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Why Subprime Mortgages Are Back

Subprime mortgages – once the bad boys of real estate lending – are coming back. Figures from the Federal Reserve Bank of St. Louis show that between 2007 and the start of 2013 subprime mortgages fell off the radar for most banks but now they have begun to make a significant comeback.

What happened to subprime mortgages and why have they begun to come back into the lending picture?

Subprime mortgages are a form of financing which is supposed to be a form of financing made available only to those with woeful credit, individuals who had bankruptcies and foreclosures in their credit reports, who routinely failed to pay back their debts, or who had a history of late payments.

Subprime mortgages make a comeback
However, in the mid-2000s, it turns out that most subprime mortgages were sold to borrowers who in fact qualified for better financing. A study by the Wall Street Journal showed that 55 percent of all subprime borrowers in 2005 actually qualified for FHA, VA and conventional financing. The Journal also reported that 61 percent of all 2006 subprime borrowers overpaid for their loans and that they actually qualified for lower-cost FHA, VA and conventional mortgages. (See: Subprime Debacle Traps Even Very Credit-Worthy, December 3, 2007).

Subprime Mortgages Impact Millions of Homeowners

The result of subprime mortgage overselling was that millions of borrowers were effectively overcharged for mortgage financing. Such homeowners were needlessly exposed to the type of lending which was most likely to wind up in foreclosure because of higher costs, substantial prepayment penalties and harsh terms and conditions.

Once the housing market began to go into decline in 2006 mainstream lenders began to back away from subprime lending as quickly as they could. By late 2008 and 2009 subprime loans were about as common as unicorn toes. In fact, subprime mortgages were so unappealing to most lenders that from 2009 to 2012 it appears that the Federal Reserve Bank of St. Louis did not even poll banks about their subprime mortgage preferences.

In 2012 the St. Louis Fed once again raised the question and found almost no banker interest in subprime mortgages. The picture began to change in 2013, and by the middle of the year roughly a quarter of the nation’s banks were showing a renewed interest in subprime lending.

Subprime Mortgages Make A Comeback

Why have subprime loans begun to show up once again as a lender offering?

The answer likely has to do with several trends.

First, the housing market has begun to improve in most markets and therefore mortgage loans have inherently less risk. For example, in the third quarter of 2013 the National Association of Realtors reported that existing home prices rose in 144 Metropolitan statistical areas out of 163 that they reviewed.

Second, today’s subprime mortgages are likely to be very different than the toxic loans offered between 2000 and 2006. For example, borrowers are going to be required to fully document loan applications and hefty down payments will be required, perhaps 20 to 30 percent down.

Third, the foreclosure crisis not only left more than seven million people without homes it also demolished lender profits and shareholder values. The banks who remain have no desire to repeat the fiasco and as a result have established tougher qualification standards.

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Big Bank Derivative Bets Nearly Double In Six Years

America’s major banks now hold derivatives with a notational worth of $225 trillion – about a third of the world total. No kidding. Trillion.

And that’s up from a mere $120 trillion six years ago. Rather than being weened off derivatives, America’s big banks are more deeply entrenched then ever.

Hopefully Wall Street has it figured out just right and there won’t be any major losses, say a few billion here or there. After all, when has Wall Street ever been wrong about financial instruments?

“Derivatives are dangerous,” says Warren Buffett. “They have dramatically increased the leverage and risks in our financial system. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks.”

While many in Washington would like to limit derivatives trading, make such trades open to public scrutiny or both, Wall Street is vehemently against regulation.

In fact, there’s a simple way to resolve derivative worries. Allow unlimited derivatives trading — but only by individuals and partnerships willing to personally take the risk of profits and losses.

What’s A Derivative?

In basic terms a derivative is a bet tied to the movement of anything that can be valued. We could have a derivative bet which says the price of a mortgage-backed security (MBS), Hungarian currency or lemonade indexes will go up by a certain date. If the value rises then one party to the derivative will make money and the other will lose. And vice versa.

Notice, however, that derivatives are not like stocks or bonds — or mortgages or home loans.

First, unlike mortgages there’s no limit to the size of a derivative bet or the size of the derivative marketplace because none of the bettors actually are required to own the underlying asset. For instance you might bet that the price of oil will rise or fall without owning a single drop. The bet concerns the movement of value and not the ownership of the oil.

Second, there’s huge leverage because not much cash is needed to enter into a derivative agreement.

Third, if you bet on a derivative you typically make an off-setting bet to limit risk. Hopefully you do it right.

$648 Trillion

According to the Bank for International Settlements (BIS), the notational value of derivatives at the end of 2011 was $648 trillion.

The gross credit exposure from these securities was believed to be $3.912 trillion according to the BIS — that’s up from $3.5 trillion at the end of 2009.

But what if the estimates are wrong? For instance, let’s say losses are just one tenth of one percent bigger than expected. Not a big deal, except in the context of international derivative levels that’s more than $640 billion.

Do taxpayers have exposure? You bet. According to the FDIC, at the end of June 2012 all depository institutions held derivatives with a notational value of $224,998 trillion. However, such bets are not spread across the entire banking system. Banks with at least $10 billion in assets hold virtually all derivatives, securities with a notational value of $224.803 trillion. While the FDIC insures deposits in some 7,200 banks and savings associations, only 59 FDIC-insured institutions have deposits of more than $10 billion. Your little community bank, savings association or credit union likely has no derivatives department.

Social Benefit

Derivatives are simply bets. They finance no factories, no research, no colleges, no homes and no cars. Any jobs they produce are incidental and inconsequential relative to the potential risk they represent, the risk that credit exposure has been incorrectly figured by hundreds of billions of dollars if not more. Since big banks hold virtually all derivatives, and since taxpayers can face massive costs if big banks fail, it follows that something should be done to limit taxpayer risk.

“In banking,” said Buffett in 2003, “the recognition of a ‘linkage’ problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a ‘chain reaction’ threat exists within an industry, it pays to minimize links of any kind.”

How can we control derivative worries? If they’re so necessary and safe, let bankers and traders take the risk. Personally.

This can be done with regulations which restrict the ownership of derivatives and derivative interests to individuals and partnerships. Federally-regulated banks, savings associations and credit unions would be prohibited from originating, buying, selling, brokering, owning, trading, holding or financing derivative interests, directly and indirectly, for themselves or for another party.

Such rules, of course, would apply to regulated financial institutions as well as their subsidiaries and partnerships, both in the US and abroad. And the regulations would also apply to financial products which fit within the definition of a derivative, even if called something else.

Under this system, derivative profits would be owned entirely by individuals and partnerships. And derivative losses? They too would be owned entirely by individuals and partnerships. No longer would taxpayers be forced to pick up the pieces if something goes wrong.

For those who believe in less government regulation here’s your chance….


This posting has been updated and expanded from material published originally by the author on the Huffington Post.

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America’s Big Banks, America’s Financial Vietnam

Three years ago the most-powerful instutitions in America were the nation’s largest banks and brokerages, Wall Street for short. While millions of people were losing their homes, their jobs and their savings, the nation’s elite extracted a $700 billion line-of-credit from Uncle Sam.

Now Wall Street is our financial Vietnam. It’s broken. The old cures and postponements won’t work. Everyone knows it.

“High risk mortgage lending and shortcomings in consumer protections for mortgage borrowers were among the most important underlying causes of the housing bubble and the financial crisis that resulted,” according to Sheila Bair, past chairman of the FDIC. “Not only did the proliferation of high-risk subprime and nontraditional mortgage products help to push home prices up during the boom, but excessive reliance on foreclosure as a remedy to default have helped to push home prices down since the peak of the market over four years ago.”

No longer are huge financial corporations seen as too big to blame — nor as too big to fail. In fact, some have even embraced the idea of a voluntary bankruptcy.

  • Stock values for the financial sector are in the dumper. Shareholder equity worth hundreds of billions of dollars has been destroyed.
  • The value of savings has been demolished with interest rates at record lows. Those who had played by the rules and put away for retirement now find themselves with pension cash that generates only tiny dribbles of income and surely less than the rate of inflation. In effect, savers are losing buying power. Many who were once financially comfortable are comfortable no more. Government, corporate and private pension plans have all been decimated.
  • According to the FDIC the banking industry had profits of $28.8 billion in the second quarter — after reducing reserves for loan losses by $21.5 billion when compared with a year earlier.
  • Large and growing demonstrations are taking place in New York, Seattle, Boston and Washington. Groups such as Occupy Wall Street, Occupy Together.org, Occupy DC and TakeBackBoston are rising with the speed of Twitter, texting, Facebook and Google.
  • A huge march for jobs and justice is scheduled for October 15th in Washington. Major unions and other organizations will be involved, according to the National Action Network.
  • Sweetheart deals between banks and regulators are falling through. The Federal Housing Finance Agency is now suing 17 major banks and servicers, alleging that mortgages worth nearly $200 billion were sold to Fannie Mae and Freddie Mac through “negligent misrepresentation.”
  • An effort to paste together a $20 billion robo-signing settlement between several major banks and the nation’s 50 attorneys general is on the rocks. Several state AGs — including New York’s Eric Schneiderman and California’s Kamala Harris — oppose a general settlement which would allow banks and servicers to avoid further mortgage and securities investigations.
  • Michael Hudson, author of The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America–and Spawned a Global Crisis, alleges that lenders have “protected fraudsters by silencing whistleblowers” in his new two-part series, The Great Mortgage Cover-Up.
  • The real size of the 2008 bailout is beginning to be understood. It wasn’t just a $700 billion line-of-credit, it was also secret funding worth $1.2 trillion according to Bloomberg News. “The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion,” says Bloomberg, which had to sue to get the information. (See: Wall Street Aristocracy Got $1.2 Trillion in Secret Loans, August 22, 2011)
  • Across the country foreclosures have slowed, not because there are more jobs or better times but because the electronic sale and transfer of mortgage notes is widely regarded as unreliable. As the Maine Supreme Court explained to one lender, their documentation was “inherently untrustworthy.”

Gutting Regulation

In even in past periods when unemployment has been high there was no mortgage meltdown that compares with what we have seen since 2007, the year home prices peaked.

So what happened?

The presidency of George W. Bush was powered in large measure by an effort to reduce both taxes and government regulation. The compassionate conservatism he promised — whatever that was — quickly was replaced with the thinking of Ayn Rand.

“When I say ‘capitalism,’” said Rand, “I mean a full, pure, uncontrolled, unregulated laissez-faire capitalism — with a separation of state and economics, in the same way and for the same reasons as the separation of state and church.”

Indeed, officials from five financial regulatory agencies told reporters in 2003 they were going to “identify and eliminate outdated, unnecessary or unduly burdensome regulations imposed on insured depository institutions.” To make sure no one misunderstood, four of the regulators stood around a pile of paperwork with pruning shears. The fifth, James Gilleran with the Office of Thrift Supervision, posed with a chainsaw.

The Securities and Exchange Commission decided in 2004 that 11 major banks and brokerages could have more liberal reserve requirements than competitors. The SEC said “the 11 firms we expect to apply under the rule amendments could realize a total reduction in haircuts of approximately $13 billion. We estimate that they will realize a total annual benefit of approximately $26 million (.2% * $13 billion = $26 million).”

How nice to give selected corporations a $26 million advantage. That sure sounds like a case of the government picking marketplace winners.

In fact, according to The New York Times, much more that $26 million was involved.

“The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.” (See: Agency’s ’04 Rule Let Banks Pile Up New Debt, October 2, 2008)

Federal Monopoly

In 2004, one major bank regulator, the Office of the Comptroller of the Currency (OCC), simply ruled that state regulators had no right to oversee national banks in any meaningful way. According to Eliot Spitzer, then the attorney general of New York:

“The OCC today issued two regulations designed to protect national banks at the expense of consumers.

“One regulation would broadly preempt all state laws against national banks, including predatory lending laws, leaving only narrow exceptions for contracts, debt collection, acquisition and transfer of property, taxation, criminal, zoning and tort laws.

“The other regulation would confer upon the OCC exclusive jurisdiction over national banks, and specifically exclude state attorneys general from enforcing consumer protection laws against national banks.

“Together, the two regulations would prevent the states from enacting or enforcing almost any law against national banks, including consumer protection laws of general applicability that apply to every other business in the state.

“These regulations would also result in an unprecedented expansion of the OCC’s powers, while at the same time shielding the banks from state enforcement officials charged with protecting their citizens from fraudulent and illegal conduct.

“The OCC regulations are opposed by a bi-partisan coalition of state officials. In fact, all 50 state attorneys general have submitted comments to the OCC opposing this action. The attorneys general have noted that OCC devotes the vast majority of its time and resources to monitoring the safety and soundness of financial institutions, and does not have the states’ experience, expertise, resources or record in addressing consumer protection issues.”

Spitzer was exactly right.

The truth is that the mortgage meltdown was entirely preventable. The Federal Reserve, under the Home Ownership and Equity Protection Act, has the unilateral right to ban mortgages and mortgage activities which it defines as “unfair and deceptive acts or practices.” Under the chairmanship of Alan Greenspan — a long-time Rand devotee — the Fed never used its power to stop option ARMs, interest-only mortgages or no-doc loan applications.

Think about it:

If the mortgages were good then the mortgage-backed securities (MBS) would be good. If the mortgage-backed securities were good then the banks and brokerages would not have massive losses, mortgage investors would be whole, the companies that “enhanced” (insured) mortgage-backed securities would be profitable, and people across the country would not be losing their homes because they financed with “nontraditional” loan products that included surprise terms, prepayment penalties and huge monthly cost increases. And if the housing sector was okay then home prices might well be stable and many of the job losses we have today would never have happened.

There’s little doubt that many will discount the marches and tweets now growing in volume and fervor. That’s a mistake. In the same way that the Vietnam war became unsustainable as political support waned, that’s now happening with the policies, tax breaks and favors for big banks, big brokerages and big corporations. It’s our new financial Vietnam and like the first one it has cost great treasure, weakened our economy, hurt our national interests and devastated the social contract.

“There’s class warfare, all right,” Warren Buffett told the New York Times, “but it’s my class, the rich class, that’s making war, and we’re winning.”

I disagree. It’s not the “rich” it’s the greedy. There are a lot of rich people — including Buffett, Bill Gates and even JPMorgan Chase CEO Jamie Dimon — who understand that higher taxes are a cheap price to pay for social consensus.

It’s also in a large sense not a left-versus-right or conservative-versus-liberal debate. Rather there’s a growing understanding that Albert Einstein was right when he said “the thinking it took to get us into this mess is not the same thinking that is going to get us out of it.”

Moreover, it’s hard to see that there are many winners. If you don’t believe it just look at the Bank of America — it’s downsizing and planning to lay-off 30,000 workers.

There is an answer. Big financial institutions need to be smaller so there’s less risk to us all. Repeal the Gramm-Leach-Bliley Financial Services Modernization Act and bring back Glass-Steagall, a 1933 law which said that a bank could make loans and collect deposits or it could raise money and sell securities — but not both. Require financial institutions to have a 5 percent cash reserve for every derivative they buy, sell, finance or insure — for themselves, for others or for a subsidiary. Limit the size of depository institutions to $100 billion in assets. Limit the size of branch networks to a maximum of ten states. Prohibit commercial banks from selling insurance or annuities. Limit ATM charges to $1. Allow state bank regulators to define predatory loans and enforce their definitions even when national banks, thrifts and credit unions are involved.

The list goes on but the point is obvious: A financial institution which can undermine the entire economy of the United States is not just too big to fail, it’s also too big to regulate and too big to exist.

Financial holding companies can divest divisions and subsidiaries until they’re rightsized, downsized, focused, leaner, more efficient and more profitable; a better deal for customers, clients, employees and shareholders. The businesses that are sold off can keep their employees and function independently — and sink or swim on their own without needing or expecting a taxpayer bailout.

Copyright 2011 OurBroker.com. All Rights Reserved.

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How To RAISE Social Security Benefits Now

Social Security is much in the news with claims that it’s going bankrupt and cries that benefits must be cut. But that isn’t the case, in fact if everyone simply paid their fair share of the costs — if bosses paid as much of their income as their workers — benefits could be maintained or even increased without raising Social Security tax rates.

Don’t believe it? According to the nonpartisan Congressional Research Service, “If
all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years.”

How It Works

Social Security is a regressive tax. That means the more you make the less you pay. Social Security is funded with taxes paid on the payments of wages for services performed as an employee — but not all wages and certainly not all income.

For 2011 the rates look like this:

2011 Social Security Tax Rates
Worker 4.2% on earnings up to $106,800
Employer 6.2% on earnings up to $106,800
Self-Employed Workers 10.4% on earnings up to $106,800
Source: Social Security Administration

If you look at the table above you can see the source of Social Security funding problems — and the gross unfairness of the system. Simply put: The households with the most money pay the lowest Social Security taxes relative to income.


The term “earnings” for Social Security purposes does not mean all the money someone earns. It means the wages received for labor but generally not dividends, interest, rent, royalties or capital gains.

Why is this important? Imagine you’re a self-employed real estate broker, computer programmer, carpenter, plumber or attorney. You have a net taxable income of $100,000. Of this amount you must pay $10,400 for Social Security. (The self-employed pay 10.4 percent because there’s no employer to pay a portion of the tax.)

Now imagine that the Johnsons receive $100,000 in dividends, interest, rent, royalties or capital gains. Their Social Security tax on such income is zero, so the Johnsons have $10,400 more than someone who sells, programs, saws, plumbs, sues or whatever because monied interests have better lobbyists on Capitol Hill than workers.


The table shows that in 2011 the Social Security tax is applied to the first $106,800 in income. For most workers this means the Social Security tax applies to 100 percent of their income. According to the Census Bureau, in 2009 — the latest year for which we have statistics — the median household income was $49,777. And remember that in a “household” we can have more than one wage earner.

Imagine that Smith makes, oh, $50,000 a year as a self-employed daycare operator. The Social Security tax is $50,000 x 10.4 percent or $5,200.

Now imagine that Jones makes $250,000 as a consultant. Jones pays 10.4 percent x $106,800 or a total of $11,107 in Social Security taxes.

Jones plainly pays more in cash than Smith — but then Jones has five times as much income and will receive a vastly larger Social Security pension when he retires. His effective Social Security rate is 4.4 percent — less than the rate paid by his maid or the person who mows his lawn.

But Isn’t Social Security Broke?

Social Security is not broke now and it will not be broke for decades. This year, 2011, it’s expected to produce $121.3 billion in net interest.

“The Social Security Trust Fund currently holds approximately $2.6 trillion and can pay full benefits through 2037,” says Rep. Xavier Becerra (D-CA), ranking member on the House Subcommittee on Social Security.

What About The Deficit?

Federal spending, deficits and surplus figures do not include money paid into the Social Security.

“By law,” says Rep. Becerra, “Social Security can only spend what it has: the contributions workers make from their paychecks, the bonds purchased with those contributions, and the interest earned on those bonds. By law, Social Security cannot contribute to the federal deficit (Chapter 7, Subchapter II, Section 401(h) of the Social Security Act).”

Why Not Privatize Social Security?

If Social Security were privatized big Wall Street banks and brokerages would be able to extract billions of dollars in fees and charges from the retirement accounts of all Americans — meaning there would be an expense where now there is none. More important, unlike Social Security and its guaranteed payments, putting retirement money in the stock market is hardly a sure thing.

According to the Federal Reserve corporate equities were worth $9.643 trillion in 2006 — and $8.514 trillion in the fourth quarter of 2010, a loss of more than a trillion dollars.

How Much Will I Get?

You can estimate your benefits by using the government’s Social Security calculator, but until you look at the numbers don’t make a down payment on a yacht just yet. The typical monthly check is paltry: According to the Pension Rights Center in 2009 the average annual benefit for retired workers was just $13,836 while the typical benefit for couples was $22,512.

What If All Wages Were Taxed?

The Congressional Research Service points out that if the Social Security tax was applied to incomes above $106,800 the actual rate could be reduced.

“Raising the taxable earnings base would lead to an increase in total federal revenues. The Joint Committee on Taxation has estimated that raising the wage base to 90% of earnings, to $186,000 in 2008, would generate $221 billion in additional revenue over the five-year budget window of 2008-2012. Over 10 years, the policy would generate more than $524 billion.”

The obvious point is that if all wage income is taxed and benefits were limited to a reasonable maximum there would be no need to reduce Social Security benefits. Indeed, so much money could be generated the actual tax rate could be lowered for everyone.

“If the base was completely eliminated for both employers and employees so that all earnings were taxed, but those earnings did not count toward benefits, solvency would be restored to Social Security. The increased revenue would eliminate 115% of the projected shortfall and the program would have a projected surplus equal to .28% of taxable payroll. Under this scenario, the payroll tax rate could be immediately lowered from 12.40% to 12.12% and the system would remain solvent for the next 75 years. However, the traditional link between the level of wages that is taxed and the level of wages that counts toward benefits would be broken.”

Notice that we’re still talking about a payroll tax — no one is being asked to pay Social Security taxes on their dividends, interest or capital gains. The rich will still have an advantage, but merely less of an advantage.

[pullquote]And notice one other point: If all payroll income was taxed we could keep the Social Security tax rate where it is — and raise monthly benefits for the elderly.
And notice one other point: If all payroll income was taxed we could keep the Social Security tax rate where it is — and raise monthly benefits for the elderly.

An Entitlement Program For The Rich

What’s being discussed here will be described by critics as, oh my, a tax increase. What’s being ignored, what will not be mentioned, is the imputed government subsidy now being paid to upper-income households in the form of lower Social Security rates and no Social Security rates. In effect, the tax not paid or underpaid is an entitlement program for the rich.

The issue, as I have said on Patrick.net, is not the rich versus everyone else, but rather a mindset which says there can never be enough personal wealth even if other people are impoverished and hurt. With such thinking it’s okay to reduce Social Security benefits if only to keep taxes low. The term “reduce Social Security benefits” is a polite way to say that some are willing to have elderly people live out their last years deciding whether their few dollars should be spent on food or rent.

Alternatively, many who are rich would readily accept higher taxes — think of Bill Gates and Warren Buffett — because they understand that higher taxes are cheap when compared with the cost of social anarchy.

“There’s class warfare, all right,” Warren Buffett told the New York Times, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Even the King of Saudi Arabia gets this concept. According to Human Rights Watch he recently increased benefits to Saudi citizens with a “$35 billion package of financial assistance to the unemployed and support for first-time home buyers,” meaning he has $35 billion less but, he hopes, also less social discontent. It’s just a guess, but the betting here is that he will not miss a meal — or close a palace.

Paying For The Benefits of America

There is — and there must be — a cost for those who want access to the vast American marketplace and the security of American society. If you’ve traveled overseas you know that the cost to be an American is entirely worthwhile, especially if you have been to poor or nondemocratic countries.

But the cost to operate our national government is now being paid disproportionately by the poor and the middle class, an arrangement which will inevitably corrode if people don’t feel they’re vested in the system — or doubt that the system is vested in them.

You can already see this. Consider the erosion of social and financial norms represented by the large number of people walking away from their homes and their mortgages, people who do not fear bankruptcy or foreclosure.

“Leaving aside the ethical question of deliberately defaulting, not making mortgage payments has left more money in the pockets of Americans,” says Barron’s. (See: Foreclosures Boost Incomes? March 30, 2011)

Whoever heard of such a thing 10 years ago? As Kenneth Lewis, a former CEO with the Bank of America, explained to the Wall Street Journal, “we’re seeing people who are current on their credit cards but are defaulting on their mortgages. I’m astonished that people would walk away from their homes.” (See: Now, Even Borrowers With Good Credit Pose Risks, December 19, 2007)

If Mr. Lewis were on the other end of the financial spectrum perhaps he would be less amazed. Or, he might consider the words of a former President:

“My position as regards the monied interests can be put in a few words,” said Teddy Roosevelt. “In every civilized society property rights must be carefully safeguarded; ordinarily and in the great majority of cases, human rights and property rights are fundamentally and in the long run, identical; but when it clearly appears that there is a real conflict between them, human rights must have the upper hand; for property belongs to man and not man to property.”
Copyright 2011 Peter G. Miller, All Rights Reserved. For permission to re-print or re-post this commentary in whole or in part send email to OurBroker.

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Mortgage foreclosure rescue scams (finally) blocked by feds

New rules from the Federal Trade Commission will make it more difficult and costly for bogus loan modification and foreclosure rescue companies to operate nationwide. Unfortunately, the rules are weaker than the standards now used by several states.

Under the Mortgage Assistance Relief Services rule, the FTC says that mortgage foreclosure rescue and loan modification services cannot collecting fees until homeowners have a written offer from their lender or servicer that they decide is acceptable. Individuals and organizations that violate the rule will be subject to FTC civil penalties. Excluded from the ruling are banks, savings and loans, federal credit unions, common carriers, and insurance companies. Attorneys may charge advance fees — but such fees must be held in an escrow (trust) account.

The MARS rule will be a substantial problem for foreclosure rescue companies and loan modifiers. Without the ability to quickly collect up front — and with a requirement to show results — most will instantly go out of business.

However, the new FTC regulations do not go as far as some states. For instance, in Maryland if a foreclosure rescue specialist sells a distressed property within 18 months after acquisition then 82 percent of any profit must be paid back to the original owner. Illinois and Minnesota have similar regulations.

The FTC further explains the details of the new regulation as follows:

The MARS rule applies to for-profit companies that, in exchange for a fee, offer to work on behalf of distressed consumers to help them obtain modifications to the terms of mortgage loans or to avoid foreclosure on those loans. The Final Rule, among other things, would: (1) prohibit providers of such mortgage assistance relief services from making false or misleading claims; (2) mandate that providers disclose certain information about these services; (3) bar the collection of advance fees for these services; (4) prohibit anyone from providing substantial assistance or support to another they know or consciously avoid knowing is engaged in a violation of the Rule; and (5) impose recordkeeping and compliance requirements.

Advance fee ban

The most significant consumer protection under the FTC’s new rule is the advance fee ban. Under this provision, mortgage relief companies may not collect any fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable, and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer. The companies also must remind consumers of their right to reject the offer without any charge.


The Rule requires mortgage relief companies to disclose key information to consumers to protect them from being misled and to help them make better informed purchasing decisions. In their advertising and in communications directed at individual consumers (such as telemarketing calls), the companies must disclose that:

  • they are not associated with the government, and their services have not been approved by the government or the consumer’s lender;
  • the lender may not agree to change the consumer’s loan; and
  • if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

Companies also must explain in their communications to consumers that they can stop doing business with the company at any time, can accept or reject any offer the company obtains from the lender or servicer, and, if they reject the offer, they don’t have to pay the company’s fee. The companies also must disclose the amount of the fee.

Prohibited claims

The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

  • the likelihood of consumers getting the results they seek;
  • the company’s affiliation with government or private entities;
  • the consumer’s payment and other mortgage obligations;
  • the company’s refund and cancellation policies;
  • whether the company has performed the services it promised;
  • whether the company will provide legal representation to consumers;
  • the availability or cost of any alternative to for-profit mortgage assistance relief services;
  • the amount of money a consumer will save by using their services; or
    the cost of the services.

In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers. Companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Attorney exemption

Attorneys are generally exempt from the rule if they meet three conditions: they are engaged in the practice of law, they are licensed in the state where the consumer or the dwelling is located, and they are complying with state laws and regulations governing attorney conduct related to the rule. To be exempt from the advance fee ban, attorneys must meet a fourth requirement — they must place any fees they collect in a client trust account and abide by state laws and regulations covering such accounts.

All provisions of the rule except the advance-fee ban will become effective December 29, 2010. The advance-fee ban provisions will become effective January 31, 2011.

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Foreclosures: Why The New York Times Is Wrong

The latest stumble in the foreclosure mess — and probably not the last — has been the revelation that huge numbers of sworn affidavits have been improperly signed. This is not a one-time whoopsie of the type we all make. This is a large-scale practice in which tens of thousands of affidavits were improperly signed, meaning big fees were earned and not-incidentally that large numbers of people lost their homes.

In practical terms the affidavits will be corrected and the overwhelming majority of foreclosures will be justified because owners failed to make their payments. That, however, is not the point. First, you can bet that among such a large number of foreclosures some were flat-out wrong and the result was that innocent families were thrown out on the street. Second, we have numerous trial lawyers standing ready at a moment’s notice or the squeal of an ambulance tire to take on such cases. Third, any family that improperly lost their home will likely get millions of dollars in damages and remedies.

So why did this happen? Writing in the esteemed Week In Review published each Sunday by the New York Times, Eric Dash raises the question of “who is really at fault?” and answers this way:

The foreclosure system, which became like Lucy and Ethel, overwhelmed at the chocolate factory. As millions of homeowners fell behind on their mortgage payments, the banks were overwhelmed. Their loan collection operations were designed to process regular payments, not handle the specialized needs of troubled borrowers.

Computer systems were outmoded; the staff lacked the training and numbers to respond properly to the flood of calls. Traditional checks and balances on documentation slipped away as filing systems went electronic, and mortgages were packaged into bonds at a relentless pace. To make matters worse, many tasks were outsourced, with little oversight by the banks or their federal regulators.

The banks say they tried valiantly to cope, including hiring more employees. Even so, many acknowledge that they were caught flat-footed. (See: A Paperwork Fiasco, October 24, 2010)

I read this and thought: You’re pulling our leg, right?


If the banks were “overwhelmed” then they were overwhelmed selectively. They certainly had no trouble staffing mortgage subsidiaries and selling as many toxic loans as possible. No staff shortage then, no worries about old computers or untrained staff. Indeed, according to the just-released book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America–and Spawned a Global Crisis by Michael W. Hudson, a former reporter with the Wall Street Journal, in case after case lenders wanted to hire the least-experienced mortgage loan officers they could find, people who would be entirely unfamiliar with any notion of lending norms.

In addition, of course, big banks have no trouble finding staff or computers to sell credit cards and student debt, obligations they love to market.

Missing Checks & Balances

Mr. Dash tells us that “traditional checks and balances on documentation slipped away as filing systems went electronic.” Okay, and who was and is at fault for the loss of such checks and balances?

Then we learn that “to make matters worse, many tasks were outsourced, with little oversight by the banks or their federal regulators.” This is a bonanza of upside-down logic. If the banks could outsource activities that made profits why can’t they outsource services that might save homes? As to our well-paid regulators, the only less observant group you could possibly find would be a gaggle of long-comatose geese.

And let’s be clear. Not all banks sold toxic loans. Most community banks didn’t and neither did most credit unions and S&Ls.

Valiant Bankers?

“The banks,” says Mr. Dash, “say they tried valiantly to cope, including hiring more employees. Even so, many acknowledge that they were caught flat-footed.”

The #1 group in the country that should have been prepared for foreclosures were the very people who created toxic loans and lowered application standards. Does anyone really think that the massive number of foreclosures we have today was not anticipated by various lenders?

The foreclosure crisis is no surprise despite repeated claims to the contrary. And even if we agree that brilliant people on Wall Street did not know what was happening with the toxic mortgages they created, marketed and sold the foreclosure crisis is not new. RealtyTrac reports that foreclosure notices have been at the rate of 300,000 per month for 17 months in a row — and that was as of July! we’re now up to 19 months in a row.

Nineteen months in a row and bankers are still under-staffed! Has no banker noticed the very large number of intelligent, articulate, educated people who are now looking for work — some of whom no doubt have experience in finance, accounting and administrative tasks? Could not some Wall Street bonus money be diverted to hire people and upgrade computers?

It would be the valiant thing to do….

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Should I Use Private Mortgage Lenders?

If you’ve been turned down for a home loan by a bank you might want to look at private mortgage lenders. This is a wide ranging group that may include some good financing sources — and not a few sharks.

In basic terms the world of lending can be divided into two groups, regulated lenders such as banks, S&Ls and credit unions and lenders who are not regulated such as your Uncle Ralph, friends and local investors.

In the first category we have national lenders and their mortgage subsidiaries who are regulated by the federal government. We also have stated-based lenders who are regulated by, well, individual states. [pullquote]There are relatively few state-regulated lenders and state rules — however protective — generally do not apply when it comes to federal lenders. [/pullquote]

The regulated lenders must play by the rules — but since lenders have lots of PAC money and many lobbyists in Washington the “rules” are hardly tough — how else would you explain why regulators allowed lenders to offer toxic loans such as option ARMs and interest-only mortgages to borrowers who plainly would be unable to repay?

Private Lenders

The attraction of cash from private lenders is that it can be available very quickly, an underwriting process may not exist and in the best case there will be little cost to originate the loan.

On the other side of the spectrum we have private lenders, a wide-ranging species of folks with cash to lend.

First, we have friends and relatives who are distinguished by the fact that they have money and are willing to provide mortgage financing for you. There are not too many of these people, in part because few individuals want to lend money for a period of 15 to 30 years.

But, if you can find friends and family who will advance you money, then you need to consider two ideas. First, congratulations, you have found a lender. Second, beware of the sticky stuff.

When you borrow money from people you know your relationship will change. Egos and status may shift. If it happens that your relationship sours over time there can be big problems. There can also be problems with other friends and relatives become jealous, or if your benefactor dies or becomes incapacitated.

To protect the lender — and to protect you — there must always be a written mortgage agreement. One source to consider is Virgin Mortgage which offers a program tailored to social lending among friends and family. Alternatively, you can have a local attorney draw up a proper loan agreement.

It could happen that when a private lender passes away that the loan will be forgiven by the will — but maybe not. In any case you need to protect yourself with a proper loan agreement just in case Uncle Ralph suddenly wants his money back or there is some question regarding interest rates or other loan terms.

Hard Money Lenders

You may also be able to get money from hard money lenders. These are lenders who seek to finance individuals who really need cash. And, as you might guess, those who need cash have lousy credit credit. The result is that they pay very high interest rates.

Hard money lenders are often unregulated because they make few loans in a given jurisdiction. Sometimes several individuals get together to create an investment group or club to share risk and to increase funding.

Whatever the situation, with a hard money lender you’re likely to need considerable equity (say 25 to 50 percent, depending on local market conditions) and you will face big up-front costs that are taken from the loan — say three to five points. [pullquote]As to interest, figure five to 10 percent above prevailing rates.[/pullquote]

Given the enormous costs of hard-money lending you can bet that a lot of borrowers fail. However, with a lot of equity the hard money lender does okay because they can foreclose and re-sell the property.

In other words, if you have a need for a hard money lender you should really consider selling the property or getting a loan modification. For specifics, speak with a HUD counselor, a local attorney or legal clinic, or find help with a community housing group or local bar association.

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What are foreclosure brokers?

It used to be that foreclosures were rare events. About .5 percent of all home loans were foreclosed in a year, a figure which reached 4.58 percent in the fourth quarter of 2009 according to the Mortgage Bankers Association.

The huge foreclosure surge has not happened everywhere — some areas have seen vastly more foreclosures than others. RealtyTrac.com reports that the six largest states in terms of foreclosure filings — California, Florida, Arizona, Illinois, Michigan and Texas — represented 60 percent of the national total in January 2010. RealtyTrac also reports that 2009 was the worst year for foreclosures since the Great Depression.


In many markets foreclosures are a large proportion of all homes available for sale. The general rule is that the greater the percentage of distressed homes on the market the weaker local prices. Until the massive inventory of unsold foreclosures is removed from the market it will be difficult if not impossible for local home prices to stabilize much less go up, especially in hard-hit foreclosure centers.

Foreclosure Brokers

In real estate there are brokers who specialize in neighborhoods, condos, farms, commercial property, etc. Specialization is important because the value and factors impacting the use of a given property can differ depending on the type of property and its purpose — a $500,000 house and a $500,000 store-front building are both priced the same but the factors which give them value and utility are radically different.

Foreclosure brokers, in general terms, are licensed real estate brokers and salespeople who specialize in distressed properties. Distressed properties include homes owned by people facing foreclosure, individuals who want to sell with a short-sale, and properties being sold by lenders, what are called real estate owned or REOs.

Distressed properties are typically more difficult to buy or sell then run-of-the-mill real estate because there may well be special considerations. For instance, the approval of a lender will be required to have a short sale. The approval of a court will be needed if an owner has filed for bankruptcy.

In exchange for more complications, of course, there can be significant discounts. With foreclosures bought from banks and other lenders the deal can sometimes be made more attractive with financing from the seller.

When looking for foreclosure brokers be sure to ask about practical experience such as the number of properties bought and sold during the past six months or a year. Be wary of folks who flash certificates and credentials — always ask how much time it took to acquire such documentation and endorsements.

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Tales Of A Big Bank Refugee

In the eyes of big banking I am a sinner of the first magnitude. My offense is not over-drafts or bounced checks, but rather the undeniable fact that I am self-employed.

I last held a job in 1971, and since then have managed to cobble together a reasonable existence as an author and consultant. Clients and publishers pay for my thoughts and words, and I gleefully deposit their checks.

This was a fine arrangement and everyone seemed pleased until a few weeks ago when the huge financial institution where I’ve banked for nearly 15 years suddenly decided they could not accept my deposits. The problem, it seems, was that some checks were made out to the business name I use in trade and not the name on my birth certificate.

“These checks were good last month,” I said to the banker. “In fact, this bank has been taking these checks for more than a decade and not one has bounced. I operate a sole proprietorship. I have no partners and no shareholders. There is no difference between me and the name on this check.”

“Well,” explained the bank officer, “You operate a business and thus require a business account. You can deposit this check into the business account and shift it into the personal account. I can sign you up for a business account right now. The cost is only $13 a month, plus a fee for checks.”

“You mean you will only take my money if I give you $13 a month?”

“Yes. That’s our policy.”

Well, okay, two can play this game. Depositors of the world unite — you have nothing to lose but excess fees and indifferent service. If bankers can have policies, so can consumers. Here are mine.

First, I don’t do business with any bank with more personnel than the Norwegian Army. What used to be my local bank has been bought, sold, absorbed, and downsized to the point where it is now a minor outpost of some distant financial colossus. Since I don’t need $500 million to open an electronics plant in Thailand, it’s fairly plain that my status as a desirable client is in question.

Second, I don’t do business with any bank where the president cannot be reached with a local phone call. With the old bank, the president seems to have moved over the years from downtown, to the suburbs, to another part of the state, and finally to a different time zone.

Third, I don’t do business with any bank that plays employee roulette. For years on end I could go into my bank and know the officers and tellers. It was good to see people starting as tellers and working their way up the system. They knew me and they knew my business. Now my big bank seems to have a new branch manager each month, and neither the tellers nor officers can identify me without a computer printout, photo ID, and thumbprint.

Do these principles work? You bet. While big banks are getting bigger, more distant, more expensive, and less useful, there are plenty of little banks that actually want my business — and yours.

After being rejected by my big bank, I went to see if I could do better at a smaller institution. In about six minutes I found one that was a hundred years old, had about local 20 branches, didn’t have a company jet, and was glad to see me.

“Can I open an account here so I can cash my checks?”

“Sure,” said the branch manager at the little bank.

“But it’s made out to the name I trade under,” I said, testing the waters.

“So what,” said the manager, as she handed me a Norman Rockwell appointment calendar. “There’s no difference between you and the name on this check.”

“I think I heard that somewhere. What will it cost to set up accounts?”

“You’ll need a business account,” said the manager, my hopes quickly fading. “But we can open one at no charge and waive all fees for the next three years. We’ll give you a $50 credit so you can get some checks to start. And then we can provide a personal account as well.”

But as good as all of this sounded, I still had one lingering question for the branch manager at the little bank.

“You think anyone will buy this place in the next few years?”

“Not a chance,” she said, “our president doesn’t know anything about financing electronic plants in Thailand.”

I’m now in the process of moving various accounts and services to my new bank — checking, savings, credit, children’s accounts, safety deposit boxes, everything. My new bank has lots of parking, short lines (or no lines) drive-in windows, ATMs, credit cards, and Saturday hours. Most importantly, they want my business.

As to the big bank, they don’t seem to miss me. I haven’t heard from this month’s manager. Perhaps next month the new person will call.

Postscript: I’m still with the same community bank, they still know my name and I can still reach the bank president with a local phone call.

Published originally by The Washington Post on December 22, 1997.

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Real Estate: Banks Excluded From Robo Call Ban

Robo calls are now largely banned, unless the caller has written permission to phone you.

“American consumers have made it crystal clear that few things annoy them more than the billions of commercial telemarketing robocalls they receive every year,– says Jon Leibowitz, Chairman of the Federal Trade Commission. “Starting September 1, this bombardment of prerecorded pitches, senseless solicitations, and malicious marketing will be illegal. If consumers think they’re being harassed by robocallers, they need to let us know, and we will go after them.”

Unfortunately, the Telemarketing Sales Rule (TSR) has some fat exceptions.

For instance: Calls from banks and politicians are not covered by the new prohibition.

Why is a robo call from a bank not an example of a prerecorded pitch, a senseless solicitation, or malicious marketing?

A bank is nothing but a business. Why are banks always a “special case” that require some sort of exemption? If a bank sells mortgage loans, why can it use robo calls to drum up business but not a mortgage broker?

Mind you, the argument is not that mortgage brokers should be allowed to use robo calls, it is instead the idea that banks should not get still-more special preferences.

Politicians, of course, never vote against their own interests, regardless of party affiliation or political creed.

Be sure to sign-up for the FTC’s do-not call list. there’s no cost, and if you get an illegal robo call the fine for that one call can be as much as $16,000.

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