Financial Reform: Mortgage Fraud Continues to Boom

Who paid $300,000 for this "structure".

Special report: Flipping, flopping and booming mortgage fraud

(Reuters) – The house on the 53rd block of South Wood Street in Chicago’s Back of the Yards doesn’t look like a $355,000 home. There is no front door and most of the windows are boarded up.

Public records show it sold in foreclosure for $25,500 in January 2009, then resold for $355,000 in October. In between, a $110,000 mortgage was taken out on the home, supposedly for renovations. This June, the property went back into foreclosure.

To Emilio Carrasquillo, head of the local office of non-profit lender Neighborhood Housing Services of Chicago (NHS), the numbers don’t add up. He believes this is a case of mortgage fraud.

It may not make the blood boil like murder or rape, but mortgage fraud is a crime that cost an estimated $14 billion in 2009 and could be hampering an already fragile recovery in the housing market. The FBI has been fighting back, assembling its largest ever team to fight it. They have their work cut out for them, though, as a tsunami of foreclosures is making classic scams easier and spawning new ones to boot.

“There’s no way any property in this neighborhood should sell for that kind of money,” said Carrasquillo, standing outside the house on Wood Street in this poor, predominantly black area of Chicago’s South Side. “Even if it was in great condition.”

Carrasquillo has identified a number of properties in Back of the Yards that sold for between $5,000 and $30,000 last year and then came back on the market for up to $385,000. He said property prices are being artificially inflated, allowing fraudsters to walk away with vast profits and making it harder for honest local people to buy a home.

Mortgage fraud takes many forms, but a well-organized scam frequently involves a limited liability company (LLC) or a “straw buyer.” In

Who paid $355,000 for this structure?

 this scheme, fraudsters use a fake identity or that of someone else who allows them to use their credit status in return for a fee. The seller pockets the money the buyer borrows from a lender to pay for the home. The buyer never makes a mortgage payment and the property goes into foreclosure.

In other words, the money simply disappears, leaving the lender with a large loss. Since the U.S. government is now backing much of the mortgage market in the absence of private investors, that means “taxpayers are ultimately on the hook for fraud,” said Ann Fulmer, vice president of business relations at fraud-prevention company Interthinx.

Back of the Yards was hit by fraud during the housing boom and Carrasquillo says the glut of foreclosures is now making it easier for scammers to pick up properties for a song and flip them for phenomenal profits.

Drug dealers and gang members have taken over abandoned houses, many adorned with spray-painted gang signs. Prior to touring the area, Carrasquillo attached two magnetic signs touting the NHS logos on his minivan’s doors to show he is not a police officer. He said he also prefers touring in the morning, as drug dealers and “gangbangers” tend not to be early risers.

“These properties are just going to sit there, boarded up, broken into and a magnet for crime,” he said. “And that makes our job of trying to stabilize this neighborhood so much harder.”

CRACKDOWN NETS MORE REPORTS OF FRAUD

The U.S. Federal Bureau of Investigation said in a report released on June 17 that suspicious activity reports (SARs) related to mortgage fraud rose 5 percent in 2009 to around 67,200, up from 63,700 the year before. The number had tripled from 22,000 in 2005 and the number of SARs for the first three months of 2010 hit nearly 38,000.

“We don’t see the number declining while foreclosures remain so high,” said Sharon Ormsby, section chief of the FBI’s financial crimes section.

Robb Adkins, executive director of the Financial Fraud Enforcement Task Force, is known as U.S. President Barack Obama’s financial fraud czar. He describes mortgage fraud as “pervasive” and fears it is exacerbating the nation’s real estate woes. “That, in turn, could act as an anchor on the economic recovery,” he said.

For the housing market to recover, potential homeowners need confidence in home prices and investors need confidence to get back into the secondary mortgage market, Adkins explained.

Since the subprime meltdown, a wide variety of scams have come to the fore. They include big cases like that of Lee Farkas, the former head of now bankrupt mortgage lender Taylor, Bean & Whitaker Mortgage Corp, charged in June with fraud that led to billions of dollars of losses. The scheme involved the misappropriation of funds from multiple sources, including a lending facility that had received funding from Deutsche Bank and BNP Paribas.

That appears to be the scam of choice. On July 22, for instance, seven defendants were indicted in Chicago in a $35 million mortgage fraud scheme involving 120 properties from 2004 to 2008 using straw buyers. Of the half dozen properties listed in the indictment, two were in Back of the Yards.

In the mid-2000s, the availability of easy money, poor due diligence by lenders and low- or no-documentation loans, acted as a magnet for fraudsters, who used identity theft and other scams to bag large sums of cash.

“During the boom it was almost like people in the real estate market could do no wrong,” said Ohio Attorney General Richard Cordray. “As ever more money rushed in, it attracted a lot of people who engaged in shady behavior.”

Instead of leaving them without a market, the crash has instead provided fraudsters with a glut of foreclosures, stricken borrowers and desperate lenders to take advantage of.

“There were plenty of opportunities for fraud on the way up and there are plenty on the way down,” said Clifford Rossi, a former chief credit officer at Citigroup and now a teaching fellow at the University of Maryland in College Park.

Alongside familiar scams like property flipping, the crash has added new terms to the lexicon: short sale fraud, builder bailouts and flopping. Rescue scams targeting struggling homeowners with false promises of help are also on the rise.

If some of the mechanisms are new, a lot of the fraudsters are not: in many cases, they turn out to be mortgage brokers, appraisers, real estate agents or loan officers. “Because they’re insiders, they see exactly what’s happening and they’re able to stay one step ahead of the game,” said Todd Lackner, a fraud investigator in San Diego. “They’re the same people who were committing fraud during the boom and they were never caught or prosecuted.”

BACK TO THE YARDS

Just a stone’s throw from downtown Chicago, Back of the Yards is the setting for Upton Sinclair’s classic 1906 novel “The Jungle,” a tale of grueling hardship and worker exploitation at the city’s stockyards. The book includes an act of mortgage fraud against an unsuspecting Lithuanian family.

“Mortgage fraud is nothing new,” said Christopher Wagner, co-managing attorney of the Ohio Attorney General’s Cincinnati office. “It’s been around for a long time.”

Saul Alinsky, considered the founder of modern community organizing, started out in Back of the Yards in the 1930s. Decades later, a young community organizer named Obama got his start near here.

The neighborhood has always been poor, but south of the old railway tracks at W 49th St, the housing crisis’ legacy of empty lots and boarded-up homes is evident on every block. There are few stores and services available — in four separate visits for this story, no police vehicles were sighted.

“This is what we refer to as a ‘resource desert,'” Carrasquillo said. “When no one pays attention to an area like this, it makes it easier to get away with fraud.”

Marni Scott, executive vice president for credit at Troy, Michigan-based lender Flagstar Bancorp, says there are virtually no untainted sales in the area. “There are no cases of Mr and Mr Jones selling to Mr and Mrs Smith.”

“We see cases of mortgage fraud around the country,” she added. “But there’s nothing out there that could match the mass-production, assembly-line fraud that’s going on here.”

In 2008 Flagstar instituted a rule whereby any loan applications here and in parts of Atlanta — another fraud hot spot — must be approved by Scott and the lender’s chief appraiser. In a Webex presentation, Scott rattles through a number of properties snapped up for pennies on the dollar in 2009 and then sold for around $360,000.

She provides an underwriter’s-eye-view of one property, on the 51st block of South Marshfield Avenue, sold in foreclosure in July 2009 for $33,000. In January of this year Flagstar received a loan application to buy the house for $355,000.

The property appraisal — compiled by an appraiser who Scott believes never visited the area — showed four nearby comparable properties of around the same age (100 plus years) sold recently for around $360,000. The trick to this kind of scheme is engineering the sale of the first few fraudulently overvalued properties to get “comps” — comparable values — to fool appraisers and underwriters alike.

“Miraculously, all of these properties were all within a very narrow price range,” Scott said with weary sarcasm. “This is a perfect appraisal for an underwriter. If you are an underwriter sitting in Kansas or California it all looks fairly straightforward so you can just hit the button and approve it.”

Using a $5 product called LoanIQ from U.S. title insurer First American Financial Corp called LoanIQ, Flagstar determined the application itself was fraudulent and there was a foreclosure rate in the area of nearly 60 percent. What is more, property prices here spiked 84 percent last year after 44 percent and 26 percent declines in 2008 and 2007.  [How mant times have you heard the MSM report that “Housing prices recovered 1% last month”]

“No neighborhood should look like this,” said Scott, who declined the application.

Last April, however, another lender approved a loan application for $335,000 on the same property from the same people.

FORECLOSURE MAGNET

Reports this year from Interthinx, CoreLogic Inc and the Mortgage Asset Research Institute (MARI) — which all provide fraud prevention tools for lenders — show foreclosure hotspots Florida, California, Arizona and Nevada are also big mortgage fraud markets.

MARI said in its April report that reported mortgage fraud and misrepresentation rose 7 percent in 2009, adding fraud “continues to be a pervasive issue, growing and escalating in complexity.”

Denise James, director of real estate solutions at LexisNexis Risk Solutions and one of the author’s reports, said reported fraud will continue to rise throughout 2010.

In its first-quarter report, Interthinx said its Mortgage Fraud Risk Index rose 4 percent to 151, the first time it had passed 150 since 2004. A figure of 100 on the index would indicate virtually no risk of fraud.

Congressman Barney Frank

According to various estimates, the 30310 ZIP code in Atlanta is one of the worst in the country. An analysis of that ZIP prepared for Reuters by Interthinx showed a fraud index of 414, making it the eighth worst ZIP code in the country. Back of the Yards — ZIP code 60609 — had an index of 309.

“In some neighborhoods in Atlanta there hasn’t been a clean transaction in 10 years,” Interthinx’s Fulmer said.

In 2005 local residents here formed the 30310 Fraud Task Force. Members sniff out potential signs of fraud — such as repeated property flipped — and report them directly to the FBI and local authorities. Information from the task force led to the arrest of a 12-member mortgage fraud ring on September 15, 2008 — better known in the annals of the financial crisis as the day Lehman Brothers filed for Chapter 11 bankruptcy protection.

Brent Brewer, a civil engineer and task force member, said the arrests had a noticeable impact on fraud in the area. “It made a statement that if you come here to commit fraud there’s a good chance you’ll get caught,” he said.

But Brewer harbors no illusions the fraudsters are gone. “There’s no way they can catch everyone who’s involved in fraud. But if you’re dumb, greedy or desperate, you’re going to get caught.”

FBI GETTING INTERESTED

Law enforcement has come a long way in combating mortgage fraud, though officials freely admit that’s not saying much.

Senator Chris Dodd

Ben Wagner, U.S. attorney for the eastern district of California, said as mortgages are regulated at the state and local level, for years there was little federal interference. Prior to the recent boom, he said, fraud simply “was not identified as a huge problem.”

“There has been a little bit of a learning curve,” Wagner said. “This was not something federal prosecutors had much familiarity with. Now we’re getting pretty good at it.”

Half of Wagner’s 50 or so criminal prosecutors focus on white-collar crime including fraud. Two new prosecutors will be dedicated solely to mortgage fraud.

Now mortgage fraud is a known quantity, Wagner said all U.S. prosecutors tackling it are linked by Internet groups. The May edition of the bi-monthly “United States Attorneys’ Bulletin” (published by the Executive Office for United States Attorneys) was devoted entirely to mortgage fraud.

The FBI has more than 350 out of its 13,000 agents devoted to mortgage fraud. There are also now 67 regular mortgage fraud working groups and 23 task forces at the federal, state and local level. “This is the broadest coalition of law enforcement ever brought together to fight fraud,” Adkins said. He admitted, however that limited resources to fight fraud still pose a challenge.

Attorney General Eric Holder

In June U.S. authorities said 1,215 people had been charged in a joint crackdown on mortgage fraud. Many of the charges were for crimes committed years ago.

Latour “LT” Lafferty, the head of the white-collar crimes practice at law firm Fowler White Boggs in Tampa, Florida, said fraud in the boom was so pervasive that many crimes will go undetected and unprosecuted. “Everyone had their hands in the cookie jar during the boom,” he said. “Lenders, brokers, Realtors, homeowners … everyone.”

OLD DOG, NEW TRICKS

A new mortgage scam born out of the housing crisis is short sale fraud. Short sales are a way for stricken homeowners to get out of their homes, whereby in agreement with their lender they sell their home for less than they paid for it and are forgiven the remainder.

But they have also proven a tempting target for fraudsters, usually involving the Realtor in the deal. Lackner, the fraud investigator in San Diego, described a typical scheme: “Let’s say you have a property up for short sale that you know as a Realtor you can get $350,000 for,” he said. “But you arrange a low-ball appraisal of $200,000 and have someone make an offer of that amount.”

Tont Rezko - Convicted Felon - Real Estate "Development"

“The Realtor says to the bank this is the best offer you’re going to get, take it or leave it,” he added. “Then they turn around and flip it immediately for $350,000. In cases like this, the lender is probably already stuck with a lot of foreclosed properties and doesn’t want more. So they go for it.”

Where the process of fraudulent appraisals overvaluing a property for sale is “flipping,” deliberately undervaluing them has become known as “flopping.”

Bob Hertzog, a designated real estate broker at Summit Home Consultants in Scottsdale, Arizona, says he gets emails from unknown firms offering to act as a “third-party negotiator” between the seller and the bank with what turns out to be a grossly undervalued bid.

Hertzog has tried tracing some of the LLCs, but describes a chain of front companies leading nowhere.

“The problem is it is so cheap and easy to set up an LLC online that sometimes they are set up for just one transaction,” Flagstar’s Scott said. “And if they’re set up using fake information or a stolen identity, it’s very hard to trace who’s behind them.”

Many web sites boast they can help you form an LLC online for under $50.

Another common target for fraud is the reverse mortgage. Designed for seniors to release equity from a property, according to financial fraud czar Adkins, they have been used to commit a “particularly egregious type of fraud.”

Fraudsters commonly forge their victims’ signatures and, without their knowledge or consent, divert funds to themselves. The scam is worst in Florida, a magnet for American retirees.

“Unfortunately it is often not until the death of the victim that their heirs realize that all of the equity has been stripped out of the property by fraudsters,” Adkins said.

But Arthur Prieston, chairman of the Prieston Group, which sells mortgage fraud insurance and has launched a patented system to rate lenders on the quality of their loans, said most mortgage fraud he comes across consists of ordinary people fudging figures to get a loan. “The vast majority of the fraud we see is where people intend to occupy a property, but can’t qualify for a loan,” he said. “They’ll do anything to get that loan approved.”

He added this is achieved with the active collusion of Realtors, brokers and lenders looking to make a sale and keep the market moving. Before his firm issues fraud insurance it reviews a lender’s loans and between 20 percent and the 30 percent of the loans reviewed so far have had “red flags.”

The problem with assessing the extent of the damage caused by mortgage fraud is that it’s not just the dollar amount of the fraud itself. It also hits property values, property taxes and often causes crime to rise.

“Most people interpret white collar crime as a victimless crime, where the bank pays the price and no one else,” said Andrew Carswell, associate professor of housing and consumer economics, University of Georgia. “This is a mistaken perception … neighborhoods and homeowners pay the price.”

UNCOVERING THE SCAMS

Companies like Interthinx, CoreLogic and DataVerify all have data-driven fraud prevention tools for lenders. Interthinx’s program, for instance, identifies some 300 “red flags” including a buyer’s identity and recent sales in a neighborhood, while CoreLogic uses pattern recognition technology. CoreLogic also aims to bring a short sale fraud product to the market soon.

Interthinx’s Fulmer said regardless of the source, on average solid fraud prevention tools can be had for as little as $10 to $15 per loan. “The tools out there enable us to see what’s going on out there right now in real time,” she said.

Apart from fraud insurance, Prieston Group’s new credit rating system for lenders should have enough data within the next year to start providing valid ratings.

Prieston said the firm’s insurance product is growing at more than 100 percent per month, while CoreLogic’s Tim Grace said the firm’s fraud prevention tool business was booming.

Many lenders are also sharing more information about bad loans, though LexisNexis’ James said it is not nearly enough. “If lenders don’t start to share more information then fraudsters will continue to go from bank to bank to bank until they’re caught,” she said.

The University of Maryland’s Rossi said what the industry needs is a “central data warehouse” to combat fraud. “There has been a failure of collective data warehousing across the industry,” he said.

Mortgage Bankers Association (MBA) spokesman John Mechem said members have no plans for a central database, but added “we view our role as being to facilitate and encourage information sharing in the industry.”

The U.S. Patriot Act of 2001 allows lenders a safe harbor to share information, but does not mandate it. “We always encourage more information sharing,” said Steve Hudak, a press officer at the U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCen. “As of now, however, this is an entirely voluntary process.”

But Rossi said the government should step in. “The Federal government is probably going to have to take the initiative because I don’t see the industry doing this one on its own,” he said. “I am personally not a fan of big government, but we need more information sharing.”

Ultimately, the expectation is lenders will be forced either to improve due diligence, or face being pushed out of business as investors burned by sloppy underwriting during the boom urge them to adopt fraud prevention tools.

“Investor scrutiny is going to be higher than it ever has been,” Rossi said. “The days of a small amount of due diligence are gone.”

Many investors are also investigating their losses and forcing lenders to repurchase bad loans. This is resulting in “thousands of repurchases a month,” according to Prieston.

“When it comes to small lenders with only a few million dollars of loans, ten repurchases will absolutely put some of them out of business,” he said.

The government now guarantees more than 90 percent of the mortgage market and forms almost the entire secondary mortgage market, as private investors have not returned. The FHA, Fannie Mae and Freddie Mac are thus seen as playing an instrumental role in pushing improved due diligence to clean up the government’s multi-trillion dollar portfolio.

FHA commissioner David Stevens was appointed in July 2009. Since then the FHA has shut down 1,100 lenders, after decades in which the government closed an average of 30 lenders annually. He says most lenders he deals with are of a “very high quality,” but that “there are still lenders that either don’t have controls in place or are proactively engaging in practices that pose a risk to the FHA.”

Stevens does not expect to shut down lenders at the same rate as the past year, but added “the number will be much higher than the historical average.”

CoreLogic’s Grace said most large lenders have the tools in place to combat mortgage fraud, but admitted he was concerned about some smaller lenders. “The next shakeout of weak lenders will take place over the next 12 to 24 months,” he said.

The MBA’s Mechem said the U.S. mortgage market must be cleaned up if it is ever to return to normal. “The one thing private investors need to get back into the secondary market is confidence,” he said. “And investors won’t risk buying mortgages if they don’t have confidence in the quality of the loans. Restoring that confidence is going to play a pivotal role in restoring the markets.”

In the meantime, mortgage fraud is expected to cause more problems in areas like Back of the Yards in Chicago.

Three doors down from the boarded-up, foreclosed property that has aroused Carrasquillo’s suspicions, father-of-three Oti Cardoso says he and his neighbors try to cut the grass at the abandoned properties on his block and to keep thieves out. But he has heard most empty houses end up occupied by gang members.

“I want my children to be safe, I don’t want drug dealers here,” he said. “I have tried to find the owner of these houses so I can work with them to help keep their homes clean.”

“If they only knew what was happening here,” he added, “I’m sure they would want to do what was right.”

http://www.reuters.com/article/idUSTRE67G1S620100817

Investors Row - half million dollar houses in a row ...

Goldman Sachs Details Where Bailout Cash Went: $4.3 Billion to European Banks

International banks and financial companies were indirect beneficiaries of the government’s 2008 bailout of American International Group Inc., according to newly released documents.

The documents released by Sen. Chuck Grassley, R-Iowa, contain a list of the 27 banks, hedge funds and financial companies that received 3). $4.3 billion from Goldman Sachs Group Inc.. The money was to reimburse them for losses on investments called credit default swaps that plunged in value during the financial crisis.

Senator Chuck Grassley

The money trail actually began with AIG, which sold the swaps to Goldman. The big investment bank in turn sold them to its customers, including the international banks and financial companies. When AIG received a bailout worth $182.5 billion, it reimbursed Goldman and other banks, which then repaid their customers.

Credit default swaps are essentially contracts that insure against the default of bonds and corporate debt. Sellers of swaps, such as AIG, are obligated to repay customers if the value of the underlying bonds or debt declines.

Much of the federal rescue money for AIG was used to pay its obligations to its Wall Street trading partners on credit default swaps. 1).The biggest beneficiary of the AIG money was Goldman Sachs, who received $12.9 billion.

According to Grassley, the documents show that the five banks or companies ultimately receiving the largest amount of taxpayer money were DZ Bank AG in Germany, which received $1.18 billion; Banco Santander Central Hispano SA of Spain, which received $484 million; Ireland’s Zulma Finance PLC, which received $416 million; Infinity Finance PLC in Britain, which received $277 million; and Britain’s Sierra Finance PLC, which received $223 million.

Another $173 million went to Hongkong & Shanghai Banking Corp., which has HSBC operations throughout the U.S.

Goldman had previously disclosed that it had made payments to its customers, but did not say who the recipients were. It gave the information to Grassley after he threatened to subpoena the bank. Grassley released the documents showing the payments late Friday.

The payments have been controversial because of concerns that the banks should have absorbed more losses on their investments rather than be reimbursed with taxpayer money. Last month, a watchdog panel raised new doubts over the likelihood taxpayers will be fully repaid for the government’s bailout of AIG.

Former Treasury Secretary Henry Paulson - Former Goldman Sachs Chairman & CEO

The government determined that a collapse of AIG would be systemically disastrous,” Goldman Sachs spokesman Lucas van Praag said. “And of course if a systemic problem had ensued, we along with every company in the world would likely have been affected.”

[Yes, and exactly how would have Goldman been affected? Read on …]

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/24/AR2010072401702.html

Remember this story:

Goldman Sachs Made BILLIONS Shorting AIG, March 2009

Goldman Sachs (GS) reiterated its claim this morning that it wouldn’t have lost anything had AIG (AIG) been allowed to fail. Indeed, the bank says, it was fully hedged. Actually, it was far more than that. It was not just fully hedged — Goldman Sachs had positioned itself to profit big-time from the fall of AIG.

Zero Hedge runs the numbers:

In a nutshell – Goldman had bought billions in AIG CDS in the 2004 to 2006 timeframe. Whether this was predicated by their expectation that subprime would blow up, or their very early understanding just how bad things at AIG were, one will never know, especially not the SEC. However, one look at the CDS chart below shows what prevailing levels for AIG’s CDS was in that time frame. As one can see, AIG 5 yr CDS traded in a range of 4 bps to 52.50 bps between October 1, 2004 (only goes back so far) and December 31, 2006. Indicatively 5 yr CDS closed yesterday at a comparable running spread equivalent of 1,942 bps.

Purchasing $10 billion in CDS (roughly in line with what Viniar claims happened) at a hypothetical average price of 25 bps (and  realistically much less than that) and rolling that would imply that at today’s AIG 5 yr CDS price of 1,942 bps, 2). the company made roughly $4.7 billion in profit from shorting AIG alone!

http://www.businessinsider.com/goldman-sachs-made-billions-shorting-aig-2009-3#ixzz0uhk3rigy

 [So let’s review the numbers from above:

Observation 1). AIG makes its largest single payment to Goldman Sachs – $12.9 billion dollars, however,

Observation 2). Goldman has stated that they were fully hedged and would not have lost a penny had AIG failed, in fact, Goldman is reported above, to have made $4.7 billion “shorting” AIG CDS.

Observation 3). Goldman paid out a reported $4.3 billion to European partners who purchased AIG CDS and we, the U.S. Taxpayers, have no idea if Goldman’s partners “shorted” the AIG CDS … making a profit on the CDS investment by following Goldman’s example of “shorting”. It is entirely possible that, like Goldman, these “partners” never lost a dime on their CDS “investments” with AIG, but actually profited from them.

Question 1). Regardless if Goldman’s partners made a dime, where did the remainder of the money go. Goldman received 12.9 billion and then made 4.7 billion shorting the CDS for a “net income” of 17.6 billion. Goldman paid out $4.3 to its “partners” based on the documents obtained by Senator Grassley. 17.6 billion minus 4.3 billion leaves $13.3 billion unaccounted for … $13.3 billion. Was that amount simply a “gift” from U.S. taxpayers? You can dole out some hefty bonuses with $13.3 billion…

 and this story

 Wall St. Helped to Mask Debt Fueling Europe’s Crisis

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and

Former New York Reserve - Current Obama Tresury Secretary Tim Geithner

 undermining the euro by enabling European governments to hide their mounting debts.

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.

Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.

Federal Reserve Chairman Ben Bernanke

A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.

Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.

The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow.

For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.

“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.

These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers

Senator Chris Dodd

 fiercely debated whether derivative deals used for creative accounting should be disclosed.

The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.

George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.

Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued,

Congressman Barney "There is nothing wrong with Fannie or Freddie" Frank

 according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.

Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.

Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”

http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=2&_r=1

McAuley’s World Comments:

The fraud that Congress just passed, the aptly named Dodd – Frank Bill, or the Financial Reform Act as it is more commonly called, does nothing to prevent or control these types of activities:

1). Fannie and Freddie are not covered or even addressed in the Dodd-Frank Bill. 

2). Sovereign debt is not covered by the Bill either…

So in summary … AIG was bailed out to the tune of $180 billion plus U.S. dollars, all from the American Taxpayer. As the financial crisis unfolded, up until the present day, Obama’s current Treasury Secretary Tim Geithner, Geithner’s predecessor as Treasury Secretary, Henry Paulson (a prior Chairman and CEO of Goldman Sachs) and current Federal Reserve Chairman Ben Bernanke all testified before Congress and the American people that the Financial Bailout was a necessity to prevent a complete collapse of our financial systems… That AIG’s failure would lead to the failure of Goldman Sachs … and Goldman Sach’s failure would lead to… and so on and so on… Only now do we find out that even had AIG failed, Goldman Sachs stood to profit from the failure, that the true beneficiaries of the AIG bailout were European banks and the anonymous purchasers of AIG Credit Default Swaps, purchasers who may have, like Goldman Sachs, completely hedged their investment in the AIG CDS in the first place … American Taxpayers may find out one day that, like TARP, the Troubled Asset Relief Program, a “Program” that never purchased even one “Troubled Asset”, that the true beneficiaries of the “Financial Industry Bailout”, were not the “advertised” beneficiaries at all …  and that, at a minimum, there is at least $13.3 billion dollars given to Goldman Sachs that isn’t accounted for…

 http://www.whorunsgov.com/Profiles/Henry_Paulson

http://www.whorunsgov.com/Profiles/Ben_Bernanke

http://www.whorunsgov.com/Profiles/Timothy_Geithner

Tim Geithner: Too Close to Goldman Sachs to Be Treasury Secretary, Critic Says     01/21/2009  

Tim Geithner apologized for not paying his taxes and some Republicans criticized his involvement in the TARP program at today’s hearing, but Barack Obama’s nominee for Treasury Secretary appears on track for confirmation.

Congress is “all in a panic” and “really clueless” about this all-important member of Obama’s cabinet, says Christopher Whalen, managing director and co-founder of Institutional Risk Analytics. “I’m just not sure Tim Geithner is the guy we should have driving the bus.”

Beyond his tax gaffe, which will mainly serve to politically weaken Obama’s pick, Whalen says Geithner is the wrong many for the job because of his decision-making as President of the New York Fed.

“I believe Tim Geithner only represents part of Wall Street – Goldman Sachs,” he says, suggesting Goldman was the “primary beneficiary of the AIG bailout” and notes Goldman alum Stephen Friedman serves on the board of the NY Fed. (Hank Paulson and Robert Rubin, with whom Geithner had frequent meetings in the past year, are also Goldman alum.)

Whalen further questions the inconsistency of the Fed’s decision to rescue Bear Stearns – in the end, their debt and shareholders got something – while letting Lehman Brothers “go to hell.” 

In the end, Whalen says he’ll fully support Geithner if and when he’s confirmed: “We have to be successful,” he says. “This is not about personality.”

Check out the video embedded in this article.

http://finance.yahoo.com/tech-ticker/article/161374/Tim-Geithner-Too-Close-to-Goldman-Sachs-to-Be-Treasury-Secretary-Critic-Says?tickers=GS,C,BAC,XLF,MS,JPM,%5EDJI 

ALSO SEE: AIG’s Secret Bailout Partners – AIG Bailout Funds Funneled To Secret Partners – Partial List Of Cash Recipients Released : A list obtained by Fortune includes the names of many foreign banks – as well as U.S. giants such as Goldman Sachs. An article that details the “payments” made to foreign banks by AIG directly, payments made in addition to the “indirect payments” made by Goldman Sachs.

https://mcauleysworld.wordpress.com/2010/06/30/financial-crisis-inquiry-commission-studies-derivatives-is-government-owned-aig-selling-cds/

https://mcauleysworld.wordpress.com/2009/03/17/senator-chris-dodds-latest-ethics-investigation-by-the-london-england-times/

http://www.freerepublic.com/focus/f-news/2121215/posts

Start Up Auto Maker Receives $528 Million Dollar Loan From US Taxpayers – To Build Vehicles In Finland

WASHINGTON – Fisker Automotive, a California manufacturer of luxury electric vehicles, will receive more than $500 million in federal loans to develop a plug-in hybrid sports car with a sticker price of nearly $90,000.

(Fisker Automotive, a California Company, is backed by former VP and current environmental huckster Al Gore.)

Fisker, launched in 2007, is expected to release its first vehicle, the Karma, in the summer of 2010. The $87,900 plug-in luxury sports sedan, which has solar panels on the roof and allows motorists to drive gas-free for 50 miles (80 kilometers), will be built in Finland by Valmet Automotive.

http://www.cnbc.com/id/32971727

 

Here We Go Again – Obama & Democrats Push For Increase In The Worst Of Risky Mortgages

I can hardly believe it when I read it.

As we all know the were two things that created our current economic turmoil, reckless government spending that we couldn’t afford and reckless lending in the mortgage market.  The bad mortgages were then packaged and sold as investment securities destroying 401’s and bank accounts all over the world.

Every day you’ll hear about the need for more regulation – That simply isn’t so – what we need is less Government spending and an end to reckless mortgage lending.

Get ready for the next round of “sub-prime mortgages”, Obama and the Democarts want to “double down” and increase the number of “high risk” mortgages funded through Fannie Mae and Freddie Mac.

Freddie Mac and Fannie Mae were the first of the bailout babies – you and I and all of the other taxpayers in this Country have been gouged for about 7 Trillion dollars to buy up the earlier batch of “bad mortagges” these entities created.

So what is Fannie Mae and Freddie Mac up to now?

Obama Seeks To Refinance More Underwater Mortgages    

July 1, 2009 1:04 PM EDT

According to various reports, the Obama administration is stepping up their efforts to stem foreclosures and will start refinancing mortgages with a loan-to-value of as much as 125% through Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The previous loan-to-value was 105%.
President Obama’s Making Home Affordable program sought to help up to 5 million mortgage holders refinance, but to date only 80,000 have been refinanced. (Sadly, of the 80,000, close to 50,000 have already  re-defaulted – what a failure). http://www.streetinsider.com/Economic+Data/Obama+Seeks+To+Refinance+More+Underwater+Mortgages/4767278.html
Consider this example – straight from the White House press release:
REFINANCING EXAMPLE
If your loan is held by Fannie Mae or Freddie Mac and you are current on your mortgage payments, you may be eligible to refinance your mortgage loan even if your LTV is up to 125%. LTV, or loan-to-value-ratio, is a measurement that compares the principal balance of your loan (the amount you currently owe) to the actual value of the house. For example, if your loan amount is $300,000 and the current value of your home is $240,000, your LTV is 300/240, or 125%. http://www.streetinsider.com/Economic+Data/FHFA+Releases+Details+Of+Plan+To+Allow+Refinances+Up+to+125%25+LTV/4767700.html
So, now the Government plans on leneding up to $300,000 on homes worth only $240,000. (Plesae note that the average price of a U.S. home this month is $178,000).
 
Where does this money come from – Your Tax Dollars.
 
For those of you who are asking, “So what does this mean?”, the answer is this. The Government will now fund mortgages to those who are underwater or indefault, with taxpayer funds, and allow the individuals to obtain loans that are, as the example above states, worth substantially more than the homes being mortgaged are worth.
 
The riskiest of all of the sub-prime mortgages were those made with no down payment and where the loan to value was above 80%. The very worst were the 125% LTV loans.  
 
Are you asking, and what happens when the person re-defaults in 6 months and walks away with the $60,000 above the home’s value? Answer – THE AMERICAN TAXPAYER IS ON THE HOOK FOR THE MORTGAGE.
 
This is a receipt for deepening the current crisis – not resolving it. 
 
The answer isn’t additional “regulation”. The Government is “regulating” that this be done.
 
The answer is in electing Politicians with an ounce of common sense.    

Obama Administration Continues to Waste 100’s of Billions In US Taxpayer Funds

Time Magazine recently pointed out that the new “GM” or “Government Motors” will employ approximately 40,000 individuals, down from the historical high of 600,000 workers it employed less than a generation ago. Through mismanagement, unreasonable unions and improper Government intervention, 14 out of every 15 jobs at GM have been lost. http://www.time.com/time/business/article/0,8599,1901345,00.html?xid=rss-biztech-yahoo  https://mcauleysworld.wordpress.com/2009/05/28/with-14-out-of-5-gm-jobs-gone-why-is-the-government-spending-100s-of-billions-of-taxpayor-dollars-on-a-company-that-will-employ-less-than-40000/

So, where does the waste come in? The Government continues to spend taxpayer dollars recklessly. Universally, the “price tag” for the Government’s purchase of GM has been estimated (best case scenario) at 100’s of billions of dollars. You might ask, “What is the current market value of GM”?

Clearly, the Obama Administration has not asked this question. Today, May 28, 2009, GM has a “market cap” or “market value” of something less than $700 Million dollars. GM is not worth even $1 Billion Dollars, let alone the $100’s of billions being committed to this “political folly”. With this type of business acumen the entire endeavor is doomed to failure. A “Market Cap” is the “total value” of all of a Companies outstanding stock. At the close of business on May 28, 2009, the total value or “Market Cap” of all GM stock was $683 Million dollars, something  just over 1/2 a Billion Dollars.

So why, exactly, is the Obama Administration paying 200% of GM’s current value to take over the failing company? I have no idea and Congress hasn’t bothered to ask. I can tell you this, no business consortium, no group of private investors would ever embark on such a course of action. No investor group would pay that amount for GM. To do so would result in a Bernie Madoff type “perp walk”. GM’s stock is currently trading at $1.12 per share, yet the Obama Administration is “investing” upwards of $150 a share in taxpayer money in this boondoggle. Only a politician woudl refer to paying 130 times the true value of anything an “investment”.  

You may have heard of Toyota Motor Car Company, a major rival of GM and the most successful car company in the world. Toyota’s “Market Cap” at the close of business on May 28th, 2009, was $137 Billion Dollars. http://finance.aol.com/quotes/toyota-motor-corporation/tm/nys

The Obama Administration is having American Taxpayers pay a “Toyota Price” for  a “GM value”. This is beyond the ridicuolus, it is criminal. The Obama Administration is paying for Toyota and getting GM in return.  

No wonder the Country is in such a mess.

Obama’s Economic Recovery Program Is Failing – New Wave of Mortgage Foreclosures, Unemployment Continues To Rise, Automakers Prepare to Shut Plants – Layoff 10’s Of Thousands

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans — those extended to home buyers with troubled credit — to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. [Remember, the Obama Administration predicted a maximum unemployment rate of 8.9 in its projections of economic recovery- McAuley’s World]

That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers’ introductory interest rates expired and were reset higher.

“We’re right in the middle of this third wave, and it’s intensifying,” said Mark Zandi, chief economist at Moody’s Economy.com. “That loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults. They’re coast to coast.”

Those sliding into foreclosure today are more likely to be modest borrowers whose loans fit their income than the consumers of exotically lenient mortgages that formerly typified the crisis. [Now that we have wasted 100’s of Billions in tax payer dollars helping the reckless and those not qualified to be homeowners, where is the assistance for those who played by the rules? Mc Auley’s World].

Economy.com expects that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.

Over all, more than four million loans worth $717 billion were in the three distressed categories in February, a jump of more than 60 percent in dollar terms compared with a year earlier.

Under a program announced in February by the Obama administration, the government is to spend $75 billion on incentives for mortgage servicing companies that reduce payments for troubled homeowners. [The Obama Administration claimed the program would help 4 million home owners]. But three months after the program was announced, a Treasury spokeswoman, Jenni Engebretsen, estimated the number of loans that have been modified at “more than 10,000 but fewer than 55,000.” [Why can’t the Government be more exact than this – a 45,000 mortgage gap between 10,000 and 55,000. Where is the $75 Billion in Taxpayer money going? If the “true number” of modified mortagges is 10,000,  the Obama program cost taxpayers $7.5 million per mortgage. Who is kidding who? Someone is robbing the US Taxpayer blind] 

In the first two months of the year alone, another 313,000 mortgages landed in foreclosure or became delinquent at least 90 days, according to First American CoreLogic.

“I don’t think there’s any chance of government measures making more than a small dent,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Last year, foreclosures expanded sharply as the economy shed an average of 256,000 jobs each month. Since then, the job market has deteriorated further, with an average of 665,000 jobs vanishing each month.

http://www.nytimes.com/2009/05/25/business/economy/25foreclose.html?pagewanted=1&sq=May%2025,%202009%20Mortgage%20foreclosures%20&st=cse&scp=1

GM announces an additional 47,000 job cuts amid palns to shut 5 US auto plants.   (February 2009). http://www.wilx.com/home/headlines/39750882.html

U.S. to steer GM toward bankruptcy … The Obama administration is preparing to send General Motors into bankruptcy as early as the end of next week under a plan that would give the automaker tens of billions of dollars more in public financing as the company seeks to shrink and re-emerge as a global competitor, sources familiar with the discussions told the Washington Post. http://scoop.chrysler.com/2009/05/22/us-to-steer-gm-toward-bankruptcy/

Chrysler confirms 6 additional plant closings – May 2009. http://scoop.chrysler.com/2009/05/06/chrysler-issues-plant-closing-statement/ 

GM plans to shut 14 more auto plants, reduce employees by 20,000.  (April 2009) Gm announces planned cuts did not go far enopugh, additional cuts planned. http://money.cnn.com/2009/04/17/news/companies/gm_jobs/?postversion=2009041712

From the WSJ: Mortgage Defaults, Delinquencies Rise

… A spokesman for the FHA said 7.5% of FHA loans were “seriously delinquent” at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.

The FHA’s share of the U.S. mortgage market soared to nearly a third of loans originated in last year’s fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA’s reserves prove inadequate to cover default losses. http://www.calculatedriskblog.com/2009/03/fha-mortgage-defaults-increase.html

 

 

Obama/Geitner Attempt to Reinflate Housing Bubble – Subprime Loans Are Back – When Will This Bubble Burst?

Just when you thought it was safe to go back in the water… Subprime lending has come roaring back.

But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down.

If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should.

The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent.

Critics, however, argue that rebates don’t end up in a buyer’s pockets until his or her 2009 tax returns are filed – even though rebates are credits, not just deductions.

Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn’t go far enough.

In an effort to boost home buying — even for marginally qualified borrowersa number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year’s refund check. This allows buyers to pay for things like closing costs, mortgage points – or even the down payment.

States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious – usually just a bit over the prime lending rate. Missouri was the first state to launch such a program, and has since been joined by Delaware, New Mexico, Pennsylvania, Tennessee and others. States are even lobbying the IRS to deposit the refunds directly to the states, rather than to the home buyers, in order to circumvent non-payment. The IRS, for its part, “is reviewing” this idea.

In Washington, the state Housing Finance Commission runs a tax credit bridge-loan program, which it hopes will grow in the coming months. Not surprisingly, local real-estate professionals are behind the initiative. Washington Association of Realtors president Bill Riley told the San Francisco Chronicle he believes around half of would-be first-time buyers in his state “cannot save enough money for the down payment and closing costs.”

Exactly. That’s the point. This is precisely what differentiates a “would-be” home buyer and a home buyer. And that’s the way it should be.

If the federal government wants to subsidize home ownership, fine. It’s already proven unwilling to learn the lessons of Fannie Mae (FNM) and Freddie Mac (FRE) about the costs of jamming borrowers into homes they can’t afford. But these rebates should at least be limited to borrowers that meet even the most modest requirements to buy a home in a responsible manner.

The Federal Housing Administration — another vehicle for government-backed mortgages where taxpayers bear all the risk — gives out loans that require borrowers to post a meager 3% down payment. If a “would-be” homeowner cannot scrape together this amount of cash, that person should rent and save their pennies. They should not receive a no-interest loan from the state government. This is not discrimination, this is not redlining, its common sense.

McAuley’s World: 3% of $250,000 is $7,500. Should the Government really be fronting the $7,500 and then loaning a quarter of a million dollars to an individual who can’t scrape together $7,500 on their own? Why doesn’t the individual simply scrape together a down payment and buy a “starter” home in the first place. The median home price in the US (half fall below, half are above) is approximately $170,000. A 3% down payment for a $170,000 loan is $5,100. If you can’t save $5,100 for a down payment, you won’t have the money to pay the increase in property taxes that will occur when the market does recover. Such a buyer is doomed to a future foreclosure, or does the Government plan on subsidizing the property taxes for these home buyers also?  Back to the article ….    

In a rush to prop up home prices and delay the ultimate day of reckoning for the vast majority of US real-estate markets, the federal government — and now state governments as well — insist on coercing taxpayers to over-leverage themselves and take on a debt burden they cannot truly afford.

From the looks of it, Washington is leading by example.

Top Stocks blogging partner Todd Harrison is founder & CEO of Minyanville.com. This post was written by Minyanville Contributor Scott Andrew Jeffery.

http://blogs.moneycentral.msn.com/topstocks/archive/2009/05/08/subprime-lending-is-back-with-a-vengeance.aspx

McAuleys’ World: Once again the Government is behind these activities … just how short can our collective memory be …….

What happens when the individual can’t pay this “second mortgage”, or the “loan” to cover the downpayment? Read on …….

Government Tackles Second Mortgages

[Apr 28, 2009.]

 The Obama administration announced plans today to address homeowners who are unable to afford the payments.

During the real estate boom, many homeowners used home equity loans and lines of credit to purchase a new home with little or no money down. These second mortgages were also used by many borrowers who took advantage of rising property values by extracting cash from the equity in their homes.

Banks were lending to people with credit challenges, borrowers who could not or did not want to document their income, and some even lent up to 125 percent of the value of someone’s home – with the expectation that real estate prices would continue to soar.

Now, these second mortgages are making it difficult for many homeowners to avoid foreclosure. Some are having success in having the terms modified on their primary mortgage, however, without modifying the terms of their home equity line of credit or home equity loan, the homeowner will be unable to meet their monthly obligations.

Obama’s previous foreclosure prevention initiatives have been criticized for not doing enough and for not addressing the second mortgage issue.

Under a new program, the government will pay mortgage servicers $500 upfront and $250 a year for three years for successfully modifying a second mortgage, such as home equity loan.

http://www.rebuild.org/news-article/government-tackles-second-mortgages/

 The Obama administration this week announced a new government program that will help some struggling homeowners to reduce their payments on a second mortgage at the same time they are modifying their first.

This is great news if you’re a homeowner who can’t repay your debts, not so great news if you would rather not see tax dollars subsidizing second mortgages. During the housing boom, many homeowners took out a second mortgage – either a home equity loan or line of credit – to make a down payment or pay for home improvements, medical bills, college bills, cars, vacations or other expenses.

The new plan builds on a mortgage modification announced in February called Making Home Affordable. That plan, which applies to first mortgages, encourages lenders to reduce payments for homeowners in danger of foreclosure by cutting their interest rate, temporarily reducing the balance and other means. The government makes payments to lenders that partially offset the reduced payment. It also pays servicers who get homeowners into modified mortgages and homeowners who stay current with their reduced mortgage payments.

The plan, like others before it, has had limited success because so many people who can’t pay their first mortgage can’t pay their second. “We estimate up to 50 percent of at-risk mortgages have second liens,” the Treasury Department says. 

Obama’s plan envisions modifying or extinguishing 1 million to 1.5 million second mortgages.

“His expectation for success seems reasonable, but I think he is paying far too much,” Morrison says. 

“Obama’s plan looks, generally, more generous,” he says. It would pay second-lien holders 3 to 12 percent on balances up to $729,750. On an average second mortgage, which Morrison says is $68,000, the payment would range from $2,040 to $8,160.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/30/BUU117BHFK.DTL&type=printable

First the Government creates a program that provides mortgages that people can’t afford, and backs those mortgages with tax dollars, then the Government pays tax dollars to have the mortgages modified when the individulas can’t make the payments. 

This will not lead to a housing recovery – it is simply reinflating the old “bubble” …… Billions of taxpayer dollars wasted on the same programs that created the problem in the first place …… 

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