Saturday, 16 October 2010

Weekend Update – October 16 2010

How America Lost its Way. Commodity Inflation Strikes.

Baltic Dry Index. 2762 +766 on the week

LIR Gold Target by 2019: $3,000.

A thing worth having is a thing worth cheating for.

Ebenezer Squid, with apologies to W.C. Fields.

More on America’s economic leadership role later, first this. Commodity inflation is back and is already feeding into consumer prices with more expected around the start of next year. In an age of unfolding European austerity, further inflation just might be the straw that breaks the camel’s back in Europe.

The cost of living has gone up another dollar a quart.

W.C. Fields.

OCTOBER 16, 2010

Flashback to 1870 as Cotton Hits Peak

Cotton prices touched their highest level since Reconstruction on Friday, as a string of bad harvests and demand from China spark worries of a global shortfall.

The sudden surge in prices—cotton has risen up to 56% in three months—has alarmed manufacturers and retailers, who worry they may be forced to pass on higher costs to recession-weary consumers.

The December cotton contract hit $1.1980 a pound minutes after the opening of trading on the IntercontinentalExchange Inc. on Friday. It is officially the highest price since records began back in 1870 with the creation of the New York Cotton Exchange.

The Mississippi Historical Society has its own records that show cotton was changing hands at $1.89 a pound during the middle of the Civil War, which lasted from 1861 to 1865. In the early stages of the war, the South halted exports in a failed attempt to draw Europe to its defense. Then later, the North imposed a blockade, crippling the South's ability to ship cotton to Europe.

The U.S. was then the largest cotton producer at the time and the halt led to what was dubbed the "cotton famine."

------The cotton surge is part of a broad-based commodities rally since the beginning of the year, underpinned by fears over a weakening dollar, healthy demand from emerging markets and various weather-related supply disruptions. Along with cotton, prices of so-called soft commodities such as sugar, orange juice and coffee all have soared, adding to concerns that consumers might soon be paying higher prices for daily necessities.

For the apparel industry, rising prices have upended roughly two decades of cheap cotton. Consumers have become used to relatively low prices, making it hard for garment producers to pass on the rising costs, especially as the economy struggles to recover.

Raw materials make up anywhere between a quarter and half of the cost to produce a garment.

The most at risk are discount retailers that compete on price and sell large quantities of cotton-based basic items, such as T-shirts. But clothing manufacturers of all price levels may be forced to decide between absorbing the costs or passing them on. Some say they also are exploring different materials, including synthetic blends.

Jeans maker Levi Strauss said earlier this year that higher cotton costs would result in price increases. And in the past month, executives from Kohl's Corp., Aeropostale Inc. and Guess Inc. have mentioned increased pressure from cotton prices.

-----Price increases could come in the first quarter next year, according to Sterling Smith, an analyst at Country Hedging, a brokerage firm.

Pakistan, the fourth-largest producer of cotton, saw its crops affected by devastating floods this summer. Heavy rains in China crimped that nation's crop, resulting in a 5.4% drop in global production in 2010.

China is the largest cotton producer, followed by India and the U.S. Even though India and the U.S. reported bountiful harvests this year, it didn't make up for the declines in China and Pakistan.

In fraudclosuregate news, the news just keeps going from bad to worse, unless you’re a US tort lawyer of course. Lawyers excepted, it’s hard to see any winners from this cesspit of Wall Street’s greed. After nearly collapsing the global financial system in 2008, America is forfeiting its economic leadership role with each new scandal that comes to light. But this one looks like becoming the scandal of all scandals. It looks increasingly like, American banksters deliberately set out to defraud each other and the world, with bogus mortgage backed securities. Now its all gone wrong, it appears that they’ve played fast and loose with the American judicial system, co-opting much of it into aiding and abetting a fraudulent attempt at cover up. If the US judicial system now trashes due process and ratifies the illegality and fraudulent documents on something as important as the transfer of title on people’s homes, US rule of law will mean nothing, and with it will end Pax Americana and US economic leadership in the G-7. If an American citizen can be put out of his home by just anyone using forged documents and falsely sworn testimony, what chance does Johnny Foreigner have in suing for damages in American courts to right alleged wrongs?

It's morally wrong to allow a sucker to keep his money.

W.C. Fields.

The Enormous Mortgage Bond Scandal

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

The key firm here is Clayton Holdings (CLAY), a company which was hired by various investment banks — Goldman Sachs (GS), Bear Stearns, Citigroup (C), Merrill Lynch (BAC), Lehman Brothers (LEHMQ.PK), Morgan Stanley (MS), Deutsche Bank (DB), everyone — to taste-test the mortgage pools they were buying from originators.

Here’s how it would work:

First, the bank would put in a winning bid for the pool of mortgages, with the intention of slicing it up into mortgage bonds and selling those bonds off to investors at a profit.

After submitting the winning bid, the bank would commission Clayton to take a closer look at a representative sample of loans in the pool. Clayton controlled as much as 70% of the market for this service, which is known as third-party due diligence. But Clayton’s not at fault here, and the problem is likely to apply no matter who performed this service.

The size of the representative sample would vary according to the size of the loan pool; it could be anywhere between 5% and 35% of the loans in the pool. Essentially, Clayton would go back to the loans, one by one, and re-underwrite them after the fact, checking that the originator’s underwriting standards were in fact being upheld.

Clayton would either accept or reject the loans it was looking at, according to whether or not they met underwriting standards. Here’s the results of what it found for one bank, Citigroup; the chart (click to enlarge) comes from this document filed with the Financial Crisis Inquiry Commission. I’m just using Citi as an example, here; all banks behaved in basically exactly the same way.

Look at the first line. Clayton reviewed 1,280 loans on behalf of Citigroup in the first quarter of 2006. Of those, it accepted 554 outright: they lived up to the originator’s underwriting standards. It also waived another 144, on the grounds that there were mitigating factors (a large downpayment, say). And it rejected 582 for a rejection rate of 45%.

This kind of information was valuable to Citigroup: it showed them that the quality of the loan pool was much lower than you’d think just by looking at the ostensible underwriting standards.

Armed with this information, Citigroup would do two things. First of all, it would take those 582 rejects and put most of them back to the underwriter. Essentially, they said, the loans weren’t as advertised, and they didn’t want them. But Citi would still keep some of them in the pool.

But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested. And those loans it couldn’t put back to the originator, because Citi didn’t know exactly which loans they were.

If there had been any common sense in the investment banks, that would have been the end of the deal. But there wasn’t. Rather than simply telling the originator that its loan pool wasn’t good enough, the investment banks would instead renegotiate the amount of money they were paying for the pool.

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

In fact, the banks had an incentive to buy loans they knew were bad. Because when the loans proved to be bad, the banks could go back to the originator and get a discount on the amount of money they were paying for the pool. And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors.

Now here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors, who were kept in the dark about that fact.

I talked to one underwriting bank — not Citi — which claimed that investors were told that the due diligence had been done: on page 48 of the prospectus, there’s language about how the underwriter had done an “underwriting guideline review”, although there’s nothing specifically about hiring a company to re-underwrite a large chunk of the loans in the pool, and report back on whether they met the originator’s standards.

In any case, it’s clear that the banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That’s a lie of omission, and if I was one of the investors in one of these pools, I’d be inclined to sue for my money back.


OCTOBER 16, 2010

Mortgage System's Woes Not Isolated

Robo-signers" who approve documents without reading them aren't the only example of sloppiness in mortgages.

As the foreclosure process comes under nationwide scrutiny, judges are questioning how servicers calculate amounts owed on loans. Some borrowers claim they lost their houses because of bungled payment processing and accounting. And there are growing worries about whether important mortgage documents were recorded properly, especially on loans packaged into securities.

It is hard for mortgage servicers to make money by doing anything but pushing paperwork through the pipeline.

Even before the mortgage meltdown, the servicing industry "was plagued with problems," such as servicers charging unauthorized or excessive fees and making false or unsubstantiated statements about how much borrowers owed, says David Vladeck, head of the bureau of consumer protection at the Federal Trade Commission, which has brought several recent cases against servicers. Mr. Vladeck said the FTC is now trying to "drill down" to make sure the servicers it regulates have the proper procedures in place to make sure underlying documentation is sufficient and accurate.

-----Servicers typically get paid a fee of 0.25% to 0.5% of a loan's balance, plus late charges and other fees when a mortgage tumbles into default. The mortgage-servicing industry is made up of scores of companies, from big banks to independent operators such as American Home Mortgage Servicing Inc.

But the cost of servicing a mortgage has more than doubled in the past five years, pressuring profit margins, says Edward Delgado, a former Wells Fargo & Co. executive who now leads the Five Star Institute, a provider of educational programs for the mortgage industry.

The consequences are causing a nightmare for the loan-servicing business and borrowers. For example, Fabiane Correa and her husband Luiz got a notice in September from Bank of America Corp. that the mortgage on their Stamford, Conn., house was in default. The couple also was told that $6,638 was past due.

Earlier this year, Mr. and Mrs. Correa got a loan modification from the Charlotte, N.C., bank as part of the Obama administration's foreclosure-prevention program. She says they have made their required loan payments since then.

"It's very emotional and frustrating," Mrs. Correa says. The couple drove to Dedham, Mass., a 360-mile round trip, to meet with a Bank of America representative in an unsuccessful effort to resolve the problem. A BofA spokeswoman says the bank is looking into the matter.

Josh Ritz, who lives in Kent City, Mich., pulled $4,400 out of his retirement plan last year after Bank of America said he needed to pay that amount to catch up on his mortgage payments. He kept making his monthly payments until April, when a BofA employee said the bank didn't want his money because the loan was past due, according to a court filing in Kent County, Mich., where Mr. Ritz is trying to block foreclosure.

Mr. Ritz and his wife "tried to do the right thing, and they came out worse," says Karen Tjapkes, the couple's lawyer. She adds that it took BofA about six months to apply the $4,400 payment to their mortgage account.

-----Some bankruptcy-court judges have recently criticized loan-servicing operations for sloppy recordkeeping and dehumanizing customer service. Earlier this month, in a longstanding case U.S. Chief Bankruptcy Judge for the Western District of Pennsylvania Thomas Agresti said in a memorandum opinion and order that Countrywide Financial Corp. acted with "reckless disregard" in its treatment of a borrower who had successfully completed her bankruptcy and paid off all her debts.

The borrower, Sharon Diane Hill, was current on her mortgage, Yet Countrywide threatened to foreclose on her home if she didn't pay thousands of dollars in additional fees, according to court filings. Ms. Hill "did everything right" but was still "put through a grinding process by Countrywide," the judge wrote in his order.

-----A 2007 study of Chapter 13 bankruptcy cases by Katherine Porter, now a visiting professor at Harvard University Law School, found that the majority of mortgage claims made in bankruptcy court are missing at least one required documents. The study also concluded that fees are "often poorly identified, making it impossible to verify if such charges are legally permissible or accurate."

The industry's problems have been complicated by the transfer of loans from one firm to another as part of the securitization process and the demise of hundreds of mortgage companies during the financial crisis.

Alicia Lang, a graphics artist in Billings, Mont., says she was trying to refinance her $116,000 loan when mortgage company Taylor, Bean & Whitaker Mortgage Corp. collapsed in 2009. After making three payments to the servicer that took over the loan, she stopped because of trouble with the company's website, expecting to get a letter about where to send her money.

Instead, an employee at another servicing firm, Ocwen Financial Corp., called saying he was a debt collector and she was behind on her loan. Ms. Lang says Ocwen had been sending mail to a house where she hadn't lived since 2000. Her current house went into foreclosure proceedings this summer.


We end on the 60 million mortgages scandal that will continue to grow and grow, leaving the last word to the NY Times Nobel economist (Keynesian) and op-ed writer Paul Krugman. It is not often I get to side with the Keynesians.

Never give a mortgagor an even break.

Ebenezer Squid, with apologies to W.C. Fields.

The Mortgage Morass

By PAUL KRUGMAN Published: October 14, 2010

American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had.

We didn’t.

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

What can be done?

True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?

The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.

What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them.

That won’t be easy, but there are good ideas out there. For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass.

One thing is for sure: What we’re doing now isn’t working. And pretending that things are O.K. won’t convince anyone.

As seen from faraway London, this mortgage foreclosure racket is the growth industry of the new millennium. A must enter industry for all. You don't even have to be American to get into it. HSBC and Deutsche Bank are already in the thick of it. Basically, as promoted by the WSJ and CNBC, these people are deadbeats anyway, no denying that they owe money to somebody, and somebody has the right to evict them. Well why not me? With a few dollars to a robo signing mill and $95 to docsfixit, with a robo signing ex-judge rushing through the foreclosures to reduce court calenders, it's got to be the cheapest ever way of doing "God's work", and building up a property empire. Who knows, with a little bit of luck and the right ex-judge, you might even end up owning 1600 Pennysilvania Avenue. After all, who really remebers what happened to the title back on August 24, 1814.

A rich man is nothing but a poor man with money.

W.C. Fields.

Have a great weekend everyone.


No comments:

Post a Comment