The Real Crooks Are The Ones Who Perpetrated This Scam – Not The Shareholders
Haters of the big banks cheered when Federal prosecutors decided to sue Bank of America (NYSE: BAC), alleging that they defrauded Fannie Mae and Freddie Mac of at least $1 billion.
But they shouldn't have. Because no matter how satisfying it might be to see justice done after the financial crash of 2008, the truth is the real crooks have already gotten away.
Now four years later, the only people that will suffer will be the bank's unfortunate shareholders, not the bad guys who perpetrated the scams that cost a fortune during the mortgage meltdown.
After all, this wasn't the first lawsuit filed against Bank of America in this mess.
Last year the Federal Housing Finance Agency filed suit against the bank for similar offenses. And in February the bank agreed to a $1 billion settlement of a case brought by the Brooklyn attorney's office claiming fraud on guarantee claims against the Federal Housing Agency.
Also in February, the bank and five other mortgage lenders combined to agree to a $25 billion settlement of claims over mortgage fraud.
Now, according to estimates by Credit Suisse, the final cost to Bank of America of all the lawsuits relating to mortgage fraud during the bubble will come to around $40 billion.
And guess where that will come from?…
Mortgages for the 'Middle-Rich' Are Class Warfare Ammunition
For weeks now I've been telling you the markets are broken.
Now I'm going to prove it.
Today I'm talking about the housing market. It's broken. The truth is Congress broke it. Of course, it had help from mortgage originators, banks, and a deliriously greedy public.
But now, amidst all the rhetoric about class warfare, wouldn't you know it, some congressmen want to further grease the wheels of an already slippery housing market for a class of homebuyers I call the "middle-rich."
It's just plain stupid. And not only will it add to our housing woes, it's ammunition for middle-class Americans, who rightly recognize they are the biggest losers in a class warfare battle they never imagined would undermine the American dream.
A Good Idea Gone Terribly Wrong
What's being debated in Congress is the maximum size of mortgages that Fannie Mae and Freddie Mac can guarantee.
The previous maximum mortgage eligible to be backed by the Government Sponsored Entities (GSEs) was $625,000. In the aftermath of the credit crisis and housing bust lobbyists easily got that maximum raised to $729,750.
The increased limit expired on September 30, 2011. But the usual lobbying forces – in this case that would be banks, mortgage originators, realtors, home builders and financial intermediaries that trade mortgage pools guaranteed by taxpayers – are pushing to extend the higher limit until at least the end of 2013.
It doesn't make sense for the government, or taxpayers, to guarantee mortgages at all. The whole scheme, which originated in the Great Depression and made good sense at that time, should have been phased out decades ago. Instead, it mushroomed.
The idea is simple enough. In order to drive money towards housing finance, the government establishes "conforming" criteria for mortgages. When mortgages conform they are believed to be of a certain standard and quality and can be packaged into mortgage-backed pools. The government guarantees the payment of principal and interest on those pools. Investors buy the pools because they are guaranteed, and the money they pay banks and originators for the mortgages in the pools goes back to originators and banks, which now have more money to make more loans to more homebuyers.
Taken at face value this isn't a bad idea. But as is so often the case with even the best ideas, there are unintended consequences. In the case of the government guaranteeing mortgages, there are plenty of very negative unintended consequences, like "moral hazard," for example.
That's why, after the horror of the Great Depression had passed, government guarantee programs should have been phased out, so that private markets could freely price the risk of originating and holding mortgages.
Unfortunately, that didn't happen. That's why we find ourselves in the situation we do today.
Money Morning's Shah Gilani Responds to Reader Comments on His Housing Plan
Dear Money Morning readers:
To every one of you (and there were more than just a few!) who took the time to comment on my housing-fix plan, thank you. I read every single comment, twice.
Money Morning readers have always impressed me with their insights and activism. That's why I write for Money Morning, I get to have a "conversation" with you, which motivates me, enlightens me and always keeps me looking at every side of all the issues I write about.
Here are some of my thoughts on your comments:
First of all, it's not possible for any comprehensive address of a problem as deep and wide as what our housing market is facing to be perfect. There is no such thing as a simple solution to such a complex set of attendant issues. And, no matter how exhaustively researched and designed a packaged solution is constructed, there will always be unintended consequences and naysayers who would rather complain about the status quo than change it.
Sorry Mr. Bernanke: There Will be a Double-Dip Recession
Despite what U.S. Federal Reserve Chairman Ben S. Bernanke said in his speech at the International Monetary Conference yesterday (Tuesday), it looks very much like we're headed for a double-dip recession.
Indeed, the economic reports of the last week or so demonstrate that the U.S. job machine was never really jump-started after the Great Recession of 2008-09.
The upshot: The U.S. economic recovery is stalling, and we're almost certainly looking at a double-dip downturn.
Recessions are always painful – and double-dip recessions are even more so.
And this second "dip" may be more of the same – a bloody economic downturn that leads into a feeble recovery with unemployment spiking to even higher levels than we're currently seeing.
But there's a slight chance that this double-dip recession could prove quite productive for the U.S economy.
Let me explain.
Housing Crisis Could Peak in 2011 as Foreclosures Rise to Record
The housing crisis could peak in 2011, as the number of homeowners receiving foreclosure notices climbs about 20%, putting a further drag on prices, according to the latest forecast from RealtyTrac Inc.
As high unemployment persists and banks resume seizures after a moratorium to correct paperwork snafus, the market will see a steady increase in volume this year, the tracker of housing data reported.
"We will peak in foreclosures and probably bottom out in pricing, and that's what we need to do in order to begin the recovery," Rick Sharga, RealtyTrac's senior vice president, said in an interview at Bloomberg News headquarters in New York. "But it's probably not going to feel good in the process."
Properties receiving notices of default, auction or repossession rose 2% from a year earlier to a record 2.87 million in 2010, the Irvine, California-based data seller said yesterday (Thursday). Actions against homeowners in default jumped despite a plunge in filings in the latter part of the year – including a 26% drop in December – as banks were forced to review their practices.
What You Don't Know about "Mortgagegate" Could Crush the U.S. Banking System
What most Americans don't know about " Mortgagegate" is that "robo-signing" of foreclosure documents is the tip of the iceberg.
The breadth and depth of this newest mortgage crisis is so dangerous that the U.S. Federal Reserve last month pre-announced another potential round of quantitative easing (pundits are calling it "QE2") to address "potential negative shocks."
In fact, the fallout potential is so numbing and the actions that birthed it so scandalous that commentators have given the crisis the Watergate-esque title of " Mortgagegate" (or, as some prefer, "Mortgage Gate").
Here's what the news-story headlines aren't telling you.
Can the Obama Administration's New Stimulus Plan Revive the Housing Market?
Worries about the sorry state of the U.S. economy have officials from the Obama administration digging deep into their bag of tricks to stop the skid before it slips into a double-dip recession.
Their latest move was announced Sunday when Housing and Urban Development Secretary Shaun Donovan said the White House plans in the next few weeks to set up an emergency loan program for the unemployed and a government mortgage refinancing effort.
Despite all the monetary and fiscal firepower the U.S. Federal Reserve and the Treasury have deployed, economic growth has slowed to an agonizing pace. The slowdown has hit the housing market particularly hard, as evidenced by home sales that dropped to record lows in July.
A Helpless Housing Market Keeps Fannie and Freddie in Limbo
Mortgage-industry industry leaders will attend a summit with government officials today (Tuesday) to discuss how to reform Fannie Mae (NYSE: FNMA) and Freddie Mac (OTC: FMCC), the two mortgage giants that so far have devoured close to $150 billion in taxpayer bailout funds.
However, that meeting is likely to be derailed by a far greater problem: After making modest progress, the housing market again appears on the verge of collapse.
"There's been a feeling in government, which seems to be more pervasive than it was six months ago, that says, 'We've solved this housing problem; let's move on to Fannie and Freddie,'" Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York told The Wall Street Journal. "But you haven't solved this housing problem. We have another round of home prices going down a little more."