Top court ruling leaves Oregon’s residential real estate market in limbo, by Thomas Hillier, Davis, Tremain Wright,

In a ruling the Oregon Supreme Court will soon review, the Oregon Court of Appeals on July 18 issued a major decision.The case, Niday v. Mortgage Electronic Registration Systems Inc., et al, held that MERS, when acting as a nominee for a named lender, is not a beneficiary under Oregon law. The practical effect of the holding is that any trust deed naming MERS the beneficiary may not be foreclosed in the name of MERS by the more expedient nonjudicial method.


A little context is in order.

In 1959, to remain competitive for loan dollars, Oregon adopted the Oregon Trust Deed Act to establish trust deeds as a real estate security instrument. For lenders needing to foreclose, the act created a summary, nonjudicial procedure that bypassed the courts and allowed no redemption rights for borrowers. Foreclosure previously was a judicial process taking two years or more to complete; now it could be done in six months with the summary procedure.

Lenders were happy because the time to liquidate a non-performing loan was substantially reduced. Borrowers benefited because there was no right to a deficiency if the debt exceeded the value of the property and borrowers could cure defaults during the foreclosure process by paying only the amount in arrears rather than the full loan balance.

Trust deeds quickly became the favored real estate security instrument.

In 1993, in part to respond to a growing practice wherein lenders were bundling loans secured by trust deeds and selling them in secondary markets, a group of mortgage industry participants formed MERS and the MERS system.

Anytime a loan is sold from one member of the MERS system to another, the sale is tracked using the MERS system. MERS, the named beneficiary as nominee for the original lender and its assigns, remains the beneficiary as the loan is sold and becomes an agent of the new note owner. With no change to the named beneficiary, there is nothing to publicly record, an administrative convenience accomplishing a central purpose of MERS.

As MERS grew in acceptance, so did its popularity. Nationwide, there are more than 3,000 lender members of MERS that account for approximately 60 percent of all real estate secured loans nationwide.

The onslaught of the Great Recession resulted in a tremendous spike in foreclosure activity. To defend foreclosure proceedings, borrowers challenged the authority of MERS, in its own name, to foreclose non-judicially.

Because the trust deed is a creature of statute, the statutory elements allowing a nonjudicial foreclosure must be followed strictly. One such element is the requirement that the name of the beneficiary and any assignee be in the public record. Niday argued that the lender, not MERS, was the beneficiary. MERS countered that it was the named beneficiary in the trust deed and had the contractual right to foreclose as nominee of the lender and its assigns.

The court sided with Niday, holding that MERS is not a “beneficiary” as defined by the act. The court wrote that the beneficiary is “the person to whom the underlying, secured obligation is owed.” It reasoned that because the lender is owed the money, that party is the beneficiary. Only the person to whom the obligation is owed and whose interest is of record may legally prosecute a nonjudicial foreclosure.

What does all of this mean? Maybe nothing if the Supreme Court finds that the Court of Appeals defined “beneficiary” too narrowly.

Short of that, many issues arise. What is the effect on completed nonjudicial foreclosures of MERS trust deeds? Such sales may be void, in which case the ownership and right to possession of thousands of foreclosed properties fall into legal limbo. Perhaps the sales are only voidable, requiring a lawsuit by the borrower within a limited time to challenge the foreclosure sale.

Titles may now be in doubt for people who bought properties either at a foreclosure sale or further along the line. Also, no market may exist for these properties if title insurers choose not to insure titles until there is some clarity.

Going forward, will MERS lenders do business in Oregon? And if so, at what cost? Loans may be more expensive to administer because they either require that all assignments be documented and recorded or foreclosure via the more expensive judicial method. As such, loans in Oregon could demand higher interest rates.

Courts will see a sharp increase in the number of judicial foreclosure filings; it’s happening in Multnomah County already. An already overcrowded judicial system will gain additional burdens.

The Legislature could step in to fix the issue by clarifying the definition of “beneficiary” to include a nominee of the lender, such as MERS. But is there political will to legislate a solution that, on the surface, seems to benefit lenders?

A practice that for many years roamed freely under the radar has suddenly exploded to the surface, leaving the mortgage industry in limbo. Quick answers to the numerous issues now pending are imperative to restore certainty to real estate markets.

When a quality check can ruin a short sale, by Chris Diaz, The Orange County Register

Chris Diaz is the founder of Charis Financial, Inc. He has over 15 years experience in helping homeowners with their mortgages and has closed hundreds of short sales over the last 4 years. His website is Send questions to; reference ³Short Sales² in the subject line. 
I was recently approved for a short sale by (my bank).  The loan was in escrow and ready to close within a few days.  I then got a letter from (the bank) denying my short sale due to “quality review”.  My approval letter wasn’t set to expire for another two weeks and nobody in (the bank) could give me a valid reason as to why I received this denial.  Have you seen this scenario before and do you have any suggestions for me as I really don’t want to lose my home to foreclosure?

Yes, the out of the blue “QA Review” denial.  This one is a difficult one because of the lack of explanation from your bank.  It’s difficult to accept that one can have an approval in hand, with an expiration date that hasn’t yet expired, and still get a denial for a reason that is unexplained.  However, this is a reality and it does happen, albeit somewhat infrequently.

Even though your lender has accepted responsibility for their part in one of the largest instances of mortgage fraud on record with the robo-signing incident, they have a QA team that dedicates a great deal of time and effort in making sure that their company is free from other purveyors of fraud.  As well they should because there are lots of unscrupulous people trying to steal a buck instead of earn one.

One recent incident, in which a bank was victimized, was where short sale negotiators were doctoring up fake approval letters along with a fake bank account to have funds wired to, and stealing money that way.  The FBI said that three California men probably netted $10 million doing that.

Here are two of the main reasons that we’ve been told as to why a QA department would deny your file and what you can do to reverse or overturn the decision:

1. Buyer information is incorrect. Sometimes QA will deny a deal if the buyer’s preapproval has inaccuracies like the wrong NMLS number, broker number, or property address.  This can also happen if the buyer’s “proof of funds” is determined to be fraudulent or doctored in any way.  We have also seen it happen where the buyer is getting a loan but has enough money in the bank to pay for a property in cash.  Even though they could’ve bought the house in cash, because there was no preapproval letter for a loan, QA denied the short sale until we provided that letter.  This has happened even if we weren’t specifically asked for the letter.

2. The Equator account being used to process the short sale has been flagged. Some banks use an automated processing system called Equator to handle their short sales.  Equator centralizes all communication for all files that a real estate licensee is working on with them.  Sometimes, a licensee can involve themselves in schemes like I described above, or can just be guilty of shoddy work and upload documents from files incorrectly.  If the QA team catches either of these two things they may flag that file or all of the files of that particular agent.  Once that happens they would contact the agent for an explanation.  However, if they feel that there are deliberate inaccuracies in the file an agent can be suspended from doing any further deals with that bank.  If that happened your deal could be denied even if there was nothing fraudulent done on yours.

If a QA team has denied your short sale, have your agent address these two situations first as they are the most common.  So long as you’re dealing with someone who is ethical, there is probably just a minor oversight of buyer info that the bank needs to have satisfied.  Have your agent submit the complete buyer info first and then call to have the decision reversed.

Apply Again for a Mortgage Refinance After Denial, Rosemary Rugnetta,

Despite what has been heard about the mortgage market for the past several years, it is not all gloom and doom for everyone. More homeowners are not underwater than there are those that are underwater. Even today, mortgage refinance applications are still up and providing existing borrowers the opportunity to obtain the current lower mortgage rates available. Applying again for a mortgage refinance after receiving a denial is a must for existing homeowners since there is a good chance for approval.

Many borrowers are or have been denied a mortgage refinance for some reason or other. The denial is often the result of a particular lender’s guidelines that were in place at the time of the mortgage refinance application. Lenders have what are called overlays for conforming mortgages which are additional guidelines on top of those issued by Fannie Mae and Freddie Mac. These are called the matrix in the lending world and differ from lender to lender. Each mortgage is approved or denied according to the matrix for that particular mortgage product. For this reason, when a borrower is denied by a lender, it should not be their final attempt. However, running from lender to lender is also not a good idea since each one will probably make a hit to the credit report which can ultimately damage the borrower’s credit scores. By inquiring for information online without using a social security number, the borrower may be able to find a lender who is able to help them. It is a much easier and efficient way of searching for help and more likely that the borrower will find success.

In some cases, it may very well be impossible at this time to refinance. Finding out the reason is important because it could be related to something on the credit report which the borrower can work on improving so that in several months they may be able to apply again for a mortgage refinance after receiving a denial. Whatever the reason is for being turned down, success is still a real possibility. surveys more than two dozen wholesale and direct lenders’ rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.

Big Rate Improvement, and new AMAZING mortgage loan products!

Happy Easter everyone!  You have got to hear about these new loan products we have available … such as 20-financed properties, only ONE-year taxes for self-employed borrowers, asset-based loans, and more … watch today’s video!

Credit Bubble Bulletin,

The S&P 500 recorded a total return for the quarter of 12.59%, the best quarterly performance since 1998.  The S&P 400 Mid-caps returned 13.50%.  Apple gained 48%.  The Morgan Stanley High Tech index jumped 21.7%.  The Morgan Stanley Retail index (trading to a new all-time record high) rose 15.5%.  The S&P 500 Homebuilding index jumped 31.6%.  The German DAX increased 17.8%, Japan’s Nikkei 19.3%, and Brazil’s Bovespa 13.7%.
For the quarter, total global corporate debt issuance of $1.16 TN just surpassed 2009’s first-quarter record.  According to Bloomberg, the $190bn issuance of developing nation debt was a new first quarter record – and was up about 50% from the year ago quarter.  At $433bn, U.S. corporate debt issuance posted a new first-quarter record.
Today’s Bloomberg Headline:  “Corporates Beat Governments in Best Start Ever.”  According to Bank of America indices, global corporate bonds returned 3.85% for the quarter.  Investment grade corporate debt earned 3.36%, while junk bonds returned 7.04%.  European corporates returned 12.9%, led by an eye-catching 22% gain on Europe’s lowest rated corporate debt.  U.S. municipal debt returned about 2.0% for the quarter.  The benchmark Markit North American Investment Grade Credit defaults swap index posted its largest quarterly decline (28.6 bps, according to Bloomberg).
Watching it all, I struggle even more with the notion of “financial repression.”  “Saver repression” and “bear suppression” make sense to me.  Returns for the rationally risk averse investor are being depressed, no doubt about that.  Yet it is an altogether different story for the financial speculator:  Instead of repression, it’s Financial Liberation.  Never has the investment landscape been so stacked against the saver and investor in favor of the speculator community.
Over the years I’ve enjoyed Bill Gross’s monthly writings.  At times I’ve taken exception with his (and his colleagues’) macro analysis – and I’ve as well tipped my hat.  I look forward to his insights – plus there’s always the intrigue:  Will he don the hat of the savvy analyst, the yearning statesman or the master poker player?  No matter what, Mr. Gross sits enviably in the catbird’s seat overseeing history’s greatest Credit Bubble and financial mania.  These days I read with keen interest.
Mr. Gross’s latest is cogent and insightful.  Our analytical frameworks share important commonalities, although this month he takes one giant leap of faith that I imagine most readers would easily gloss right over:  From Mr. Gross:  “On the whole, however, because of massive QEs and LTROs in the trillions of dollars, our credit based, leverage dependent financial system is actually leverage expanding, although only mildly andsystemically less threatening than before, as least from the standpoint of a growth rate.”  Systematically less threatening than before?  The $64 Trillion question.
Along the lines of Mr. Gross’s view, I’ve held that notions of systemic deleveraging are largely urban myth.  Here in the U.S., household debt has been contracting mildly (from a historically extreme level).  The corporate balance sheet keeps expanding, although nothing compared to ballooning federal obligations.  For three years now I’ve posited the “global government finance Bubble” thesis.  There is overwhelming evidence supporting the “granddaddy of all Bubbles” view, not the least of which is that federal liabilities have doubled in only four years.
I have posited the profound role played by “moneyness of Credit.”  Moneyness, in concert with Federal Reserve and global central bank policymaking, has allowed the U.S. Treasury to issue Trillions of (nonproductive) debt at the most meager of risk premiums.  Unprecedented federal debt issuance has been instrumental in ensuring ongoing total system Credit expansion, in the process inflating incomes, corporate cash flows, local government receipts, and asset prices generally.  The Greek government and economy also enjoyed moneyness for years as it accumulated hundreds of billions of unmanageable debt.  I would argue strongly that nothing could be more threatening to system stability than a massive issuance of public sector debt in response to a bursting private sector Credit Bubble.  Especially when government debt comprises the foundation of a frail mountain of system Credit, one cannot overstate the systemic risks associated with government Credit losing the perception of moneyness in the marketplace.
This week was loaded plum full of fascinating central bank commentary.  Chairman Bernanke continued with his four-part college lecture series, “The Federal Reserve and the Financial Crisis.”  Defending extraordinary policy measures, Chairman Bernanke commented:  “We did stop the meltdown.  We avoided what would have been, I think, a collapse of the global financial system.”  Monday, Dr. Bernanke’s surprisingly dovish comments regarding labor market and economic weaknesses helped stoke U.S. equities and global risk markets (while pressuring our currency).  His comments emboldened those believing the Chairman is determined to go forward with additional quantitative easing come hell or high water.
Noted Stanford professor (the “Taylor Rule”) and former Undersecretary of the Treasury, John Taylor, upped the pressure on the Fed a notch with his Wall Street Journal op-ed, “The Dangers of an Interventionist Fed.”  An economist after my own analytical heart, Dr. Taylor argues persuasively against the Fed’s interventionist approach, while reintroducing the old “rules versus discretion” central bank policymaking debate.  “For all these reasons, the Federal Reserve should move to a less interventionist and more rules-based policy of the kind that has worked in the past.”  Yes, sir.  Dr. Taylor also argues for the end to the Fed’s dual mandate, replacing it with a single goal of “long-term price stability.”  His provocative piece is worthy of a future CBB, but for now I’ll simply interject that a singular, although necessarily complex, goal of “long-term monetary stability” would be superior.
And while we’re on the subject of monetary stability, Bundesbank President and ECB Governing Council member Jens Weidmann Wednesday presented provocative analysis in his “Rebalancing Europe” speech.  “Just like the ‘Tower of Babel,’ the ‘Wall of Money’ will never reach heaven.  If we continue to make it higher and higher, we will, in fact, run into more worldly constraints” that may include “incentives that lead to new problems in the future.”  “In any case, we must realise that all the money we put on the table will not buy us a lasting solution.”  The Germans/“Austrians” just have a very different way at looking at monetary and economic affairs.  They make sense.
And yesterday from Market News International:  “Addressing the root causes of the ongoing crisis, Weidmann stressed that ‘Europe has to be rebalanced.’ While some have argued that both countries with persistent current account deficits and surpluses have to make changes, Weidmann stressed that it is the deficit states that need to adjust.  ‘It is true that surplus countries have benefited through higher exports.  But ultimately, it was the deficit countries that operated an unsustainable model defined by a credit-fuelled boom in domestic demand, and this model has to be reformed… And we must acknowledge that surplus countries are already helping to ease the burden of adjustment…  What are the rescue packages other than publicly guaranteed interim loans to facilitate the adjustment?’   …Turning to the ‘central fear’ of deflation, Weidmann conceded that prices and wages would fall as fiscal and other economic adjustments take place. ‘But we must not confuse such a one-time adjustment with full-fledged deflation.’”
Between Taylor and Weidmann, it’s tempting to proclaim that the focus of monetary analysis this week took a dramatic turn for the better.  And even Chairman Bernanke seemed, at least momentarily, to be a party to more grounded analysis.
March 29 – Bloomberg (Craig Torres and Jeff Kearns):  “Federal Reserve Chairman Ben S. Bernanke said financial stability is no longer a ‘junior partner’ to monetary policy and central banks should try to defuse threats in the future.   ‘The crisis underscored that maintaining financial stability is an equally critical responsibility,’ Bernanke said… ‘As much as possible, central banks and other regulators should try to anticipate and defuse threats to financial stability and mitigate the effects when a crisis occurs…’ Bernanke’s comments align him with German central bankers such as Otmar Issing, the former chief economist for the European Central Bank, who have long argued that leaning against credit-fueled financial bubbles was a core responsibility of central banks.”
Well, it’s a start, but I highly doubt Mr. Issing would today believe that Dr. Bernanke and the Fed are even remotely aligned with the German view of things.  To venture a guess, I’d even state that Issing (and fellow German statesmen) likely views U.S. policymaking as more preposterous than ever.  There is, after all, a long-running rivalry between Federal Reserve and Bundesbank doctrines.  And when Bundesbank President Weidman points his finger at “deficit countries” in Europe as primary instigators of system imbalances and fragilities, appreciate that from the German perspective the blame for global imbalances and instabilities rests predominantly with the big, perpetual deficit country in which we live.  European imbalances are a microcosm of international imbalances, and the European crisis is but a harbinger of a much more serious global debt crisis.  The U.S. has “operated an unsustainable model defined by a credit-fuelled boom in domestic demand, and this model has to be reformed.”
As I’ve argued over the years (in the “Austrian” tradition), it is indeed the deficit countries that, in the process of borrowing to finance consumption above their capacity to produce, create/inject new monetary claims into the system.  Persistent Current Account Deficits matter tremendously.  For one, they disturb monetary stability and nurture disorder.  Attendant monetary inflation fuels self-reinforcing dynamics, including asset inflation (and only more consumption!), a massive accumulation of global financial claims, and attendant economic maladjustment and imbalances.  The German/“Austrian” view holds that real economic wealth is created by an economy producing more than it consumes.  Credit excess leads to little more than financial, economic and policymaking trouble.  And I fully expect the Germans, more confident in their framework than ever, to be increasingly forceful in defending their position now that they have become a lightning rod for global pressure and ridicule.
I would prefer to take Bernanke at his word:  “Central banks and other regulators should try to anticipate and defuse threats to financial stability…”  To begin with, there’s his important qualification “as much as possible.”  And today he shows nothing but dogged determination to move forward with his “activist” (inflationist) monetary experiment.
Somehow, he’s yet to be convinced of the merits of preempting Bubbles.   If he or other members of the Fed are really interested in defusing threats, I would first and foremost point them to the massive federal deficits that their policymaking is complicit in fostering (both through slashing rates and enormous Treasury and security purchases).  Second, they might want to take a look at the tripling of FHA insurance over the past few years (to surpass $1.0 TN).  And then they might consider trying to defuse the unprecedented expansion of student loans that poses risk to millions of borrowers as well as the American taxpayer.  They might ponder the underlying issue of rampant inflation in the cost of higher education.  I would also suggest taking a deep dive into “derivatives,” although I am confident they don’t want to go there.  How about the hedge funds and speculative leveraging in the Treasury and agency securities markets?
And, in the final analysis, if the Federal Reserve ever gets serious about promoting financial stability they’ll want to rethink their proclivity for pegging interest rates at low levels, intervening in the marketplace and grossly distorting the financial markets.

Yesterday from Bloomberg (Craig Torres and Jeff Kearns):  “Today’s lecture focused on the Fed’s response, the regulatory response, and the long-term implications of both. The students gave Bernanke a gift today: a framed front page from The New York Times’ April 20, 1933 edition which featured a four-column headline announcing: ‘Gold Standard Dropped Temporarily To Aid Prices and Our World Position; Bill Ready for Controlled Inflation.’”


For The Week:

The S&P 500 gained 0.8% (up 12.0% y-t-d), and the Dow increased 1.0% (up 8.1%).  The S&P 400 Mid-Caps added 0.3% (up 13.1%), while the small cap Russell 2000 was little changed (up 12.1%).  The Banks were up 0.4% (up 26.3%), while the Broker/Dealers were down 2.2% (up 26.6%).  The Morgan Stanley Cyclicals slipped 0.3% (up 16.3%), while the Transports added 0.7% (up 4.7%).  The Morgan Stanley Consumer index increased 1.2% (up 5.6%), and the Utilities gained 1.3% (down 2.6%).  The Nasdaq100 was 1.0% higher (up 21%), and the Morgan Stanley High Tech index jumped 1.4% (up 21.7%).  The Semiconductors increased 0.7% (up 20.4%).  The InteractiveWeek Internet index rose 1.3% (up 17.9%).  The Biotechs surged 5.4% (up 29.5%).  Although bullion increased $6, the HUI gold index slipped 0.1% (down 5.2%).

One-month Treasury bill rates ended the week at 3 bps and three-month bills closed at 7 bps.  Two-year government yields were down 2 bps to 0.3%. Five-year T-note yields ended the week down 4 bps to 1.04%. Ten-year yields dipped 2 bps to 2.21%.  Long bond yields rose 3 bps to 3.34%.  Benchmark Fannie MBS yields declined 7 bps to 3.06%.  The spread between 10-year Treasury yields and benchmark MBS yields narrowed 5 bps to 85 bps.  The implied yield on December 2013 eurodollar futures declined 6 bps to 0.78%.  The two-year dollar swap spread was down slightly to 25 bps. The 10-year dollar swap spread was little changed at 8 bps. Corporate bond spreads were mixed.  An index of investment grade bond risk was unchanged at 91 bps.  An index of junk bond risk increased 22 to 574 bps.

A week that concluded record first quarter debt issuance.  Investment grade issuers included Metlife $1.5bn, Prudential $1.0bn, Health Care REIT $600 million, Massmutual $500 million, Flowers Foods $400 million, Lincoln National $300 million, University of Pennsylvania $300 million, Vessel Management Services $230 million, and Potomac Electric Power $200 million.

Junk bond funds saw inflows slow to $456 million (from Lipper). Junk issuers Lawson Software $1.0bn, Hercules Offshore $500 million, Vanguard Health $375 million, Meritage Homes $300 million, USG Corp $250 million, Harron Communications $225 million, Avis Budget Rental Car $125 million, and Kemet Corp $125 million.

I saw no convertible debt issuance.

International dollar bond issuers included Russia $7.0bn, Lyondellbasell $3.0bn, Vale Overseas $2.25bn, UBS $2.0bn, HSBC $2.0bn, DNB Bank $2.0bn, Barrick Gold $2.0bn, Boligkreditt $1.25bn, Svenska Handelsbanken $1.25bn, Korea National Oil $1.0bn, OGX Austria $1.0bn, CEZ AS $1.0bn, Heineken $750 million, China Resources Gas Group $750 million, Canada Oil Sands Trust $700 million, Anglo American $600 million, Zoomlion $400 million, Banco Latinoamericano $400 million, and Kommunalbanken $300 million.

In a volatile week, Spain’s 10-year yields ended the week down 2 bps to 5.33% (up 29bps y-t-d). Ten-year Portuguese yields sank 98 bps to 11.25% (down 152bps). The new Greek 10-year note yield surged 99 bps to 20.54%.  Italian 10-yr yields ended the week up 7 bps to 5.10% (down 193bps).  German bund yields fell 7 bps to 1.79% (down 3bps), and French yields declined 6 bps to 2.88% (down 26bps).  The French to German 10-year bond spread narrowed one to 109 bps. U.K. 10-year gilt yields dropped 7 bps to 2.20% (up 23bps).  Irish yields were up 3 bps to 6.74% (down 152bps).

The German DAX equities index declined 0.7% (up 17.8% y-t-d).  Japanese 10-year “JGB” yields fell 4 bps to 0.98% (unchanged).  Japan’s Nikkei added 0.7% (up 19.3%). Emerging markets were mixed.  For the week, Brazil’s Bovespa equities index fell 2.0% (up 13.7%), while Mexico’s Bolsa jumped 3.1% (up 6.6%). South Korea’s Kospi index declined 0.6% (up 10.3%).  India’s Sensex equities index added 0.2% (up 12.6%).  China’s Shanghai Exchange sank 3.7% (up 2.9%). Brazil’s benchmark dollar bond yields rose 6 bps to 3.17%.

Freddie Mac 30-year fixed mortgage rates dropped 9 bps to 3.99% (down 87bps y-o-y). Fifteen-year fixed rates declined 7 bps to 3.23% (down 86bps).  One-year ARMs fell 6 bps to 2.78% (down 48bps).  Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates unchanged at 4.61% (down 78bps).

Federal Reserve Credit increased $1.5bn to $2.873 TN.  Fed Credit was up $275bn from a year ago, or 10.6%.  Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 3/28) declined $3.1bn to $3.474 TN. “Custody holdings” were up $54.0bn y-t-d and $66.5bn year-over-year, or 2.0%.

Global central bank “international reserve assets” (excluding gold) – as tallied by Bloomberg – were up $912bn y-o-y, or 9.7% to $10.295 TN.  Over two years, reserves were $2.455 TN higher, for 31% growth.

M2 (narrow) “money” supply fell $22.6bn to $9.788 TN.  “Narrow money” has expanded 6.8% annualized year-to-date and was up 9.3% from a year ago.  For the week, Currency increased $2.1bn.  Demand and Checkable Deposits dropped $21.8bn, while Savings Deposits increased $2.3bn.  Small Denominated Deposits declined $3.5bn.  Retail Money Funds slipped $2.0bn.

Total Money Fund assets declined $17.2bn to $2.605 TN (low since August).  Money Fund assets were down $90bn y-t-d and $131bn over the past year, or 4.8%.

Total Commercial Paper outstanding increased $6.3bn to $938bn.  CP was down $22bn y-t-d and $144bn from one year ago, or down 13.3%.

Global Credit Watch:

March 30 – Bloomberg (Angeline Benoit):  “Spain will raise corporate taxes and slash public spending as it seeks to make good on a pledge to trim the deficit by more than a third this year to prevent the country from falling victim to the region’s debt crisis.  The 2012 budget plan unveiled after a Cabinet meeting in Madrid… seeks to avoid making consumers fund the cuts to reduce the budget gap to 5.3% of gross domestic product from 8.5% last year. The plan won’t raise value-added tax, cut pension payments or reduce civil-servants wages, Deputy Prime Minister Soraya Saenz de Santamaria said.  ‘We are in a critical situation that has forced us to respond with the most austere budget of the Spanish democracy,’ said Budget Minister Cristobol Montoro.”

March 29 – Financial Times (Victor Mallet):  “Millions of Spaniards joined a one-day general strike on Thursday in a protest called by trade unions against the labour reforms and austerity plans of the centre-right government.  Mariano Rajoy, the Popular party prime minister elected in November with a mandate to reform the Spanish economy and avert the need for a bailout by the European Union and the International Monetary Fund, said there was ‘total’ normality despite the strike when he arrived at parliament in Madrid.”

March 27 – Bloomberg (Charles Penty):  “Spanish banks are using loans from the European Central Bank to buy domestic government debt in a recycling exercise that hasn’t stopped 10-year yields from climbing back above 5% in recent weeks.  Investments in government debt by Spanish banks climbed to a record 230 billion euros ($307bn) in January from 178 billion euros in November, a jump of 29%… ‘The increase in debt purchases by the Spanish banks has been massive and it’s clear it’s coming from the LTRO,’ said Tobias Blattner, an economist at Daiwa Capital Markets… ‘The key point is that Spanish banks can’t keep up the pace because the situation is still so volatile and prone to changes of sentiment.’”

March 29 – Bloomberg (Lucy Meakin and Keith Jenkins):  “Spanish bonds fell the most in a week as a general strike by the nation’s unions highlighted the challenges facing the government as it seeks to cut costs and reduce the deficit… Spain’s Budget Minister Cristobal Montoro presents the 2012 budget tomorrow, which aims to reduce the deficit even as the economy contracts. Greece may have to restructure its debt again, Moritz Kraemer, head of sovereign ratings at Standard & Poor’s, said… ‘The economic situation in Spain is gloomy,’ said Sercan Eraslan, a fixed-income strategist at WestLB AG… ‘There’s speculation about Spain and Portugal, and that’s the main driver today for Spanish and Italian debt. S&P’s warning on Greece, that it may need a second restructuring, provided uncertainty of new contagion fears.’”

March 27 – Bloomberg (Sharon Smyth):  “Prices for Spanish homes fell 3.4% in the first quarter from the previous three months as the euro area’s fourth-largest economy shrank and reduced mortgage lending crimped demand… ‘Prices have continued to fall due to difficulty in obtaining mortgage financing,’ said Fernando Encinar, co-founder of Idealista. ‘Legislation passed by the government in February to push banks to provision for real estate will result in similar declines over the remaining quarters of the year.’”

March 28 – Bloomberg (Jana Randow):  “Growth in loans to households and companies in the 17-nation euro area slowed in February… Loans to the private sector grew 0.7% from a year earlier after gaining an annual 1.1% in January, the ECB said… The rate of growth in M3 money supply… increased to 2.8% from 2.5%.”

March 29 – Bloomberg (Lorenzo Totaro):  “Investors are facing the return of political risk in Italy as Prime Minister Mario Monti’s plan to make it easier to fire workers divides his ruling coalition.  Unless Italy is ‘ready for what we think is a good job, we may not seek to continue,’ Monti said… prompting concern the government won’t last until elections due by May 2013. He made the comments after leaders of the Democratic Party, which has backed his unelected government, said they would seek to reverse the change in Parliament.”

March 28 – Dow Jones:   “Moody’s… downgraded its ratings on five Portuguese banks, pointing to mounting pressure from their home country’s weakening economy… A prolonged economic downturn had made it harder for Portugal to tame its budget gap, suggesting the country will face an uphill battle to regain investors’ confidence. Government-bond yields have improved this week, though they remain at elevated levels that suggest distress.”

March 28 – Bloomberg (Maria Petrakis):  “Greek voters are unlikely to give any party a workable majority in elections as soon as next month, jeopardizing austerity policies on which bailout funds depend.  Opinion surveys show as many as eight parties may win seats in the 300-member legislature…  ‘All polls suggest the Greek elections won’t lead to a majority one-party government,’ said Athanasios Vamvakidis, head European currency strategist at Bank of America Merrill Lynch… ‘Without a strong government in Greece that can implement the program, a disorderly default that could lead to euro exit remains a possibility.’”

March 29 – New York Times (Peter Eavis):  “If Nicolas Sarkozy loses France’s presidential election, he may want to set up a hedge fund.  Last year, the French president suggested that European banks could make profits by taking out cheap loans from the European Central Bank and investing that money in the region’s government bonds. Central bank data… underscored just how popular that trade had become, particularly in Italy and Spain, both of which were struggling to sell bonds at reasonable interest rates at the start of this year.  The data show a huge revival of demand among Italian and Spanish banks for government bonds after the central bank made cheap three-year loans available in December last year, and again in February… ‘It is very clear supporting evidence for the Sarkozy trade,’ said Julian Callow, an analyst with Barclays in London.”

Global Bubble Watch:

March 30 – Bloomberg (Sridhar Natarajan):  “Bond sales globally have exceeded a record $1.16 trillion in the first three months of 2012 as moves by global central banks along with reduced risk from Europe’s sovereign debt crisis drive credit-market optimism.  Offerings by companies from Europe to Asia and the U.S. have surpassed the previous record of $1.155 trillion reached in the first quarter of 2009…  Yields on global corporate bonds fell to 4.12% on March 29, within 15 basis points of the lowest yield in records going back to 1997…”

March 27 – New York Times (Binyamin Appelbaum):  “In a speech that sought by turns to deflate optimism and pessimism about the labor market, the Federal Reserve chairman, Ben S. Bernanke, said Monday that the Fed’s efforts to stimulate growth were gradually reducing unemployment, but that the scale and duration of the problem could leave lasting scars on the economy.  ‘Recent improvements are encouraging,’ he said. However, he continued, ‘millions of families continue to suffer the day-to-day hardships associated with not being able to find suitable employment… Because of its negative effects on workers’ skills and attachment to the labor force, long-term unemployment may ultimately reduce the productive capacity of our economy…’”

March 27 – Bloomberg (Joshua Zumbrun):  “Federal Reserve Chairman Ben S. Bernanke said the central bank’s aggressive response to the 2007-2009 financial crisis and recession helped prevent a worldwide catastrophe.  ‘We did stop the meltdown,’ Bernanke said today in the third of four lectures to undergraduates at George Washington University. ‘We avoided what would have been, I think, a collapse of the global financial system.’”

March 27 – Wall Street Journal (Jon Hilsenrath and Kristina Peterson):  “Federal Reserve Chairman Ben Bernanke said the central bank’s easy-money policies are still needed to confront deep problems in the labor market, moving to reinforce his plan to keep interest rates low for years.  His comments… were striking after several months of improvement in the jobs market. The comments also ran counter to a view that has emerged in financial markets recently that the Fed could back away from its low-interest-rate policies by next year.”

March 26 – Bloomberg (Nikolaj Gammeltoft and Whitney Kisling):  “Hedge funds trailing the Standard & Poor’s 500 Index for the last five months are giving up on bearish bets and buying stocks at the fastest rate in two years.   A gauge of hedge-fund bullishness measuring the proportion of bets that shares will rise climbed to 48.6 last week from 42 at the end of November 2011, the biggest increase since April 2010… The Bloomberg aggregate hedge fund index gained 1.4% last month, lagging behind the Standard & Poor’s 500 Index by 2.65 percentage points.  Money managers struggling to catch up with the gains have contributed to the rally that pushed the S&P 500 up 27% since October…”

March 29 – Bloomberg (Sridhar Natarajan):  “Corporate bond sales in the U.S. soared to a record $427 billion in the first three months of 2012, beating a previous quarterly high set a year ago as companies tap the debt market at the lowest-ever borrowing costs.  Offerings by companies from the neediest to the most creditworthy surpassed the previous record of $397 billion reached in the first quarter of 2011…  Yields on investment-grade bonds fell to 3.4% on March 2, the lowest in records dating back to 1986…”

March 28 – Bloomberg (Sarah Mulholland):  “Sales of asset-backed bonds tied to U.S. consumer loans rose to pre-financial crisis levels as automakers led by Ford Motor Co. boosted offerings amid the fastest acceleration in the U.S. auto market since February 2008.  Firms… issued $33.7 billion of the securities in the three-month period ended March 23, the most since the first quarter of 2008…”

March 29 – Bloomberg (Jeffrey McCracken, Matthew Campbell and Cathy Chan):  “Global dealmaking slumped for a third straight quarter as chief executive officers funneled cash into share buybacks and new products…  Mergers and acquisitions so far this quarter fell 14% from the fourth quarter to $418 billion, making it the slowest three-month period in 2 1/2 years…”

Currency Watch:

The dollar index slipped 0.5% this week to 78.95 (down 1.5% y-t-d).  On the upside for the week, the Swedish krona increased 1.8%, the Norwegian krone 1.1%, the British pound 0.6%, the Swiss franc 0.6%, the euro 0.6%, the Danish krone 0.5%, the Singapore dollar 0.3%, the Taiwanese dollar 0.2%, the South Korean won 0.2%, the South African rand 0.1%, and the New Zealand dollar 0.1%.  On the downside, the Australian dollar declined 1.2%, the Brazilian real 0.9%, the Japanese yen 0.6%, the Mexican peso 0.5%, and the Canadian dollar 0.1%.

Commodities Watch:

The CRB index dropped 1.9% this week (up 1.0% y-t-d). The Goldman Sachs Commodities Index sank 2.1% (up 6.8%).  Spot Gold recovered 0.4% to $1,668 (up 6.7%).  Silver gained 0.7% to $32.48 (up 16%).  May Crude fell $3.85 to $103.02 (up 4%).  May Gasoline declined 1.8% (up 24%), while May Natural Gas sank 10.4% (down 29%). May Copper added 0.4% (up 11%).  In wildly volatile trading, May Wheat ended the week up 1.0% (up 1%) and May Corn slipped 0.4% (down 0.4%).

China Watch:

March 27 – Bloomberg:  “Chinese Premier Wen Jiabao  pledged to ban the use of public funds to buy cigarettes and ‘high- end’ alcohol, warning that corruption may endanger the ruling Communist Party’s survival.  Wen spoke at a State Council…  He also said state-owned enterprises and agencies must ‘strictly control’ funds used to renovate ‘luxury’ office buildings or buy artwork.  ‘Corruption is the biggest danger facing the ruling party,’ Wen said… ‘If not dealt with properly, the problem may change the nature of, or terminate, the political regime.’”

March 28 – Bloomberg (Katya Kazakina and Scott Reyburn):  “A Chinese Imperial jade seal and album of calligraphy are being re-offered for sale this week after their Asian bidders failed to pay.  The sales in France are the latest sign of auction houses clamping down on slow payments and nonpayments. Amid a growing appetite by wealthy Chinese for art, wine and other collectibles, sellers are demanding deposits by bidders on top lots and, in some cases, suing the non-payers.  Sotheby’s sales that were canceled on 19 lots between 2008 and 2011 amounted to about $22 million… The… auctioneer started nine lawsuits in Hong Kong, naming successful bidders for the first time.”

Asian Bubble Watch:

March 28 – Bloomberg (Shamim Adam):  “Asian policy makers are preparing to double a $120 billion reserve pool to defend the region against shocks, reducing their reliance on traditional backstops such as the International Monetary Fund as Europe saps resources.  Officials… will discuss boosting to $240 billion the so-called Chiang Mai Initiative Multilateralization agreement, a foreign- currency reserve pool created by Japan, China, South Korea and 10 Southeast Asian nations that took effect in 2010… The IMF, which bailed out South Korea, Indonesia and Thailand during the 1997-98 Asian financial crisis, estimates that the euro area will take up about 80% of its total credit in 2014.”

Latin America Watch:

March 27 – Bloomberg (Matthew Bristow and Andre Soliani):  “Brazil’s bank lending expanded last month at the slowest pace in two years…  Outstanding credit rose 17.3% in February from a year ago to 2.03 trillion reais ($1.1 trillion)… From a month ago credit rose 0.4% after declining a revised 0.1% in January.”

Europe Economy Watch:

March 30 – Financial Times (Ralph Atkins):  “Eurozone inflation has remained stubbornly high this month, dropping only slightly to 2.6%, complicating the European Central Bank’s task as the eurozone economy struggles to return to growth.  The modest fall in the annual inflation rate, from 2.7% in February, was less than expected…  It will increase resistance within the ECB’s governing council, which meets next Wednesday, to any further relaxation of monetary policy…”

March 29 – Bloomberg (Brian Parkin):  “German unemployment fell more than forecast in March, adding to evidence that growth in Europe’s biggest economy is gaining traction as the debt crisis recedes… The adjusted jobless rate slipped to 6.7%, a two-decade low.”

March 30 – Bloomberg (Carol Matlack and Tommaso Ebhardt):  “Enrico Cioni, a 36-year-old high school teacher who lives near Venice, bought himself a red Alfa Romeo MiTo in 2010, figuring the sporty little hatchback would be fun to drive and save on gas. Instead, as Italy raised gas taxes 24% over the past year, his fuel spending soared to 200 euros ($267) a month…  Austerity measures introduced by Prime Minister Mario Monti’s government have pushed Italian gas prices to the highest in Europe, an average of 1.82 euros per liter, or $9.17 per gallon, with taxes accounting for about 54% of the total…”

March 29 – Bloomberg (Lorenzo Totaro):  “Italy’s underground economy last year amounted to 35% of the country’s gross domestic product, research institute Eurispes said.  Transactions in the so called ‘black economy’ reached as much as 540 billion euros ($717bn) in 2011… The figures show ‘a loss of purchasing power, salaries among the lowest in Europe, a sharp rise of goods’ prices, wider use of consumer credit as a way to integrate salaries, and a subsequent increase of poverty,’ according to the report.”

March 29 – Bloomberg (Joao Lima and Anabela Reis):  “Portugal’s central bank said the economy will contract more than previously forecast in 2012 and won’t grow next year as consumer spending drops and export growth eases.  Gross domestic product will fall 3.4% this year after declining 1.6% in 2011… In January, the bank forecast GDP would decrease 3.1% in 2012, also a bigger drop than previously estimated, and predicted that the economy would expand 0.3% in 2013.”

March 29 – Bloomberg (Josiane Kremer):  “Norway’s… jobless rate fell in March as record petroleum investments boost economic growth and demand for labor in the world’s seventh-largest oil exporter.  The unemployment rate dropped to 2.6% from 2.7% in February…”

Global Unbalanced Economy Watch:

March 29 – Financial Times (James Fontanella-Khan):  “Dilma Rousseff, Brazil’s president, has accused western countries of causing a ‘monetary tsunami’  by adopting aggressive expansionist policies such as low interest rates, which are making emerging economies less competitive globally.  Speaking at an emerging nations summit in New Delhi…, Ms Rousseff attacked developed countries for monetary policies that are helping the US and European economies at the cost of causing greater global trade imbalances.  ‘This (economic) crisis started in the developed world,’ Ms Rousseff said. ‘It will not be overcome simply through measures of austerity, fiscal consolidations and depreciation of the labour force, let alone through quantitative easing policies that have triggered what can only be described as a monetary tsunami, have led to a currency war and have introduced new and perverse forms of protectionism in the world.’”

March 28 – Bloomberg (Svenja O’Donnell):  “Britons suffered the biggest drop in disposable income in more than three decades last year in a squeeze that may continue this year as energy prices increase.  Real household disposable income fell 1.2%… That’s the biggest drop since 1977 when the then Labour government sought to cap incomes growth in an attempt to bring down inflation…  ‘We expect that real incomes will fall again this year, reflecting low nominal wage growth and little or no job growth,’ said Michael Saunders, an economist at Citigroup… ‘Consumer spending is likely to remain subdued for several years.’”

March 28 – Bloomberg (Mariam Fam and Alaa Shahine):  “Amir Mohammed has been sleeping outside the Libyan Embassy in Cairo awaiting a visa for a week… He has given up on finding a job in Egypt and is looking for a way out.  ‘I’m trying to just eke out an existence in my own country, but I can’t,’ the 30-year-old hairdresser said.  ‘There’s no work. Why did we have a revolution? We wanted better living standards, social justice and freedom. Instead, we’re suffering.’  The world’s highest youth jobless rate left the Middle East vulnerable to the uprisings that ousted Egypt’s Hosni Mubarak and three other leaders in the past year. It has got worse since then. About 1 million Egyptians lost their jobs in 2011… Unemployment in Tunisia, where the revolts began, climbed above 18%…”

U.S. Bubble Economy Watch:

March 30 – Associated Press (Noreen Gillespie and Paul Wiseman):  “Across the country, Americans plunked down an estimated $1.5 billion on the longest of long shots: an infinitesimally small chance to win what could end up being the single biggest lottery payout the world has ever seen.  But forget about how the $640 million Mega Millions jackpot could change the life of the winner. It’s a collective wager that could fund a presidential campaign several times over, make a dent in struggling state budgets or take away the gas worries and grocery bills for thousands of middle-class citizens.”

Central Bank Watch:

March 30 – Bloomberg (David Tweed and Jana Randow):  “Former European Central Bank Chief Economist Juergen Stark said policy makers didn’t expect banks to borrow so much in their three-year loan operations.  ‘Nobody had expected the dimensions of this program,’ Stark said… While it was appropriate to consider these operations, the ECB is now on the hook for three years and it will take time to shrink its balance sheet, he said.”

March 30 – Dow Jones (Christopher Lawton):  “The German central bank will no longer accept government or other bank bonds from Ireland, Greece and Portugal as collateral, becoming the first euro-zone central bank to exercise a new privilege to protect their balance sheets from the region’s debt crisis.  The decision signals the determination of the Deutsche Bundesbank to limit risks from the non-standard measures the European Central Bank has taken to combat market stress during the crisis.  More broadly, it reflects concerns that the ECB’s crisis-fighting measures may be encouraging banks to shift debt of dubious value to central bank balance sheets, ultimately exposing taxpayers to what may wind up being toxic assets.”

March 26 – Bloomberg (Caroline Salas Gage and Rich Miller):  “Federal Reserve Chairman Ben S. Bernanke may be hesitating to extol the improving economy — in part to preserve the central bank’s own reputation.  While Fed policy makers upgraded their assessment of the outlook at their March 13 meeting after the most-robust six- month period of job growth since 2006, they reiterated their plan to keep interest rates near zero until at least late 2014, citing still ‘elevated’ unemployment and ‘significant downside risks.’ Bernanke also told Congress last week that higher energy costs may curb growth by sapping consumer spending.”

Muni Watch:

March 27 – Bloomberg (Michelle Kaske):  “Municipal bonds rated near speculative grade are headed for their best rally in seven months as top-grade interest rates around 21-year lows drive investors to riskier debt.  Tax-exempt securities rated BBB and due in 10 years yielded 145 bps more than similar-maturity AAA munis yesterday, near the narrowest gap since Aug. 3…”

Real Estate Watch:

March 27 – Bloomberg (Prashant Gopal and John Gittelsohn):  “Matthew and Carina Hensley offered $10,000 more than the asking price for a three-bedroom house in suburban Seattle, then lost out to one of seven other bidders.  Their $270,000 proposal last month came with a family portrait and a letter introducing the couple, their eight-month- old daughter, Harper, and their desire to build a family in the Renton, Washington, house… Bidding wars, absent from most parts of the U.S. residential market since its peak in 2006, are erupting from Seattle and Silicon Valley to Miami and Washington, D.C. The inventory of homes hovers close to a six-year low, while an increase in jobs and record affordability are tempting more buyers. The number of contracts to buy previously owned homes jumped 14% in February from a year earlier…

CoreLogic: 11.1 Million U.S. Properties with Negative Equity in Q4,

CoreLogic released the Q4 2011 negative equity report today.

CoreLogic … today released negative equity data showing that 11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011. This is up from 10.7 million properties, 22.1 percent, in the third quarter of 2011. An additional 2.5 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.8 percent of all residential properties with a mortgage nationwide in the fourth quarter, up from 27.1 in the previous quarter. Nationally, the total mortgage debt outstanding on properties in negative equity increased from $2.7 trillion in the third quarter to $2.8 trillion in the fourth quarter.

“Due to the seasonal declines in home prices and slowing foreclosure pipeline which is depressing home prices, the negative equity share rose in late 2011. The negative equity share is back to the same level as Q3 2009, which is when we began reporting negative equity using this methodology. The high level of negative equity and the inability to pay is the ‘double trigger’ of default, and the reason we have such a significant foreclosure pipeline. While the economic recovery will reduce the propensity of the inability to pay trigger, negative equity will take an extended period of time to improve, and if there is a hiccup in the economic recovery, it could mean a rise in foreclosures.” said Mark Fleming, chief economist with CoreLogic.

Here are a couple of graphs from the report:

CoreLogic, Negative Equity by StateClick on graph for larger image.

This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:

Nevada had the highest negative equity percentage with 61 percent of all of its mortgaged properties underwater, followed by Arizona (48 percent), Florida (44 percent), Michigan (35 percent) and Georgia (33 percent). This is the second consecutive quarter that Georgia was in the top five, surpassing California (29 percent) which previously had been in the top five since tracking began in 2009. The top five states combined have an average negative equity share of 44.3 percent, while the remaining states have a combined average negative equity share of 15.3 percent.”

CoreLogic, Distribution of EquityThe second graph shows the distribution of equity by state- black is Loan-to-value (LTV) of less than 80%, blue is 80% to 100%, red is a LTV of greater than 100% (or negative equity). Note: This only includes homeowners with a mortgage – about 31% of homeowners nationwide do not have a mortgage.

Some states – like New York – have a large percentage of borrowers with more than 20% equity, and Nevada, Arizona and Florida have the fewest borrowers with more than 20% equity.

Some interesting data on borrowers with and without home equity loans from CoreLogic: “Of the 11.1 million upside-down borrowers, there are 6.7 million first liens without home equity loans. This group of borrowers has an average mortgage balance of $219,000 and is underwater by an average of $51,000 or an LTV ratio of 130 percent.

The remaining 4.4 million upside-down borrowers had both first and second liens. Their average mortgage balance was $306,000 and they were upside down by an average of $84,000 or a combined LTV of 138 percent.”


America’s Credit and Housing Crisis: New State Bank Bills,

Seventeen states have now introduced bills for state-owned banks, and others are in the works.  Hawaii’s innovative state bank bill addresses the foreclosure mess.  County-owned banks are being proposed that would tackle the housing crisis by exercising the right of eminent domain on abandoned and foreclosed properties.  Arizona has a bill that would do this for homeowners who are current in their payments but underwater, allowing them to refinance at fair market value.

The long-awaited settlement between 49 state Attorneys General and the big five robo-signing banks is proving to be a majordisappointment before it has even been signed, sealed and court approved.  Critics maintain that the bankers responsible for the housing crisis and the jobs crisis will again be buying their way out of jail, and the curtain will again drop on the scene of the crime.

We may not be able to beat the banks, but we don’t have to play their game.  We can take our marbles and go home.  The Move Your Money campaign has already prompted more than 600,000 consumers to move their funds out of Wall Street banks into local banks, and there are much larger pools that could be pulled out in the form of state revenues.  States generally deposit their revenues and invest their capital with large Wall Street banks, which use those hefty sums to speculate, invest abroad, and buy up the local banks that service our communities and local economies.  The states receive a modest interest, and Wall Street lends the money back at much higher interest.

Rhode Island is a case in point.  In an article titled “Where Are R.I. Revenues Being Invested? Not Locally,” Kyle Hence wrote in ecoRI Newson January 26th:


According to a December Treasury report, only 10 percent of Rhode Island’s short-term investments reside in truly local in-state banks, namely Washington Trust and BankRI. Meanwhile, 40 percent of these investments were placed with foreign-owned banks, including a British-government owned bank under investigation by the European Union.

Further, millions have been invested by Rhode Island in a fund created by a global buyout firm . . . . From 2008 to mid-2010, the fund lost 10 percent of its value — more than $2 million. . . . Three of four of Rhode Island’s representatives in Washington, D.C., count [this fund] amongst their top 25 political campaign donors . . . .

Hence asks:

Are Rhode Islanders and the state economy being served well here? Is it not time for the state to more fully invest directly in Rhode Island, either through local banks more deeply rooted in the community or through the creation of a new state-owned bank?

Hence observes that state-owned banks are “[o]ne emerging solution being widely considered nationwide  . . . . Since the onset of the economic collapse about five years ago, 16 states have studied or explored creating state-owned banks, according to a recent Associated Press report.”

2012 Additions to the Public Bank Movement

Make that 17 states, including three joining the list of states introducing state bank bills in 2012: Idaho (a bill for a feasibility study), New Hampshire (a bill for a bank), and Vermont (introducing THREE bills—one for a state bank study, one for a state currency, and one for a state voucher/warrant system).  With North Dakota, which has had its own bank for nearly a century, that makes 18 states that have introduced bills in one form or another—36% of U.S. states.  For states and text of bills, see here.

Other recent state bank developments were in Virginia, Hawaii, Washington State, and California, all of which have upgraded from bills to study the feasibility of a state-owned bank to bills to actually establish a bank.  The most recent, California’s new bill, was introduced on Friday, February 24th.

All of these bills point to the Bank of North Dakota as their model.  Kyle Hence notes that North Dakota has maintained a thriving economy throughout the current recession:

One of the reasons, some say, is the Bank of North Dakota, which was formed in 1919 and is the only state-owned or public bank in the United States. All state revenues flow into the Bank of North Dakota and back out into the state in the form of loans.

Since 2008, while servicing student, agricultural and energy— including wind — sector loans within North Dakota, every dollar of profit by the bank, which has added up to tens of millions, flows back into state coffers and directly supports the needs of the state in ways private banks do not.

Publicly-owned Banks and the Housing Crisis

A novel approach is taken in the new Hawaii bill:  it proposes a program to deal with the housing crisis and the widespread problem of breaks in the chain of title due to robo-signing, faulty assignments, and MERS.  (For more on this problem, see here.)  According to a February 10th report on the bill from the Hawaii House Committees on Economic Revitalization and Business & Housing:

The purpose of this measure is to establish the bank of the State of Hawaii in order to develop a program to acquire residential property in situations where the mortgagor is an owner-occupant who has defaulted on a mortgage or been denied a mortgage loan modification and the mortgagee is a securitized trust that cannot adequately demonstrate that it is a holder in due course.

The bill provides that in cases of foreclosure in which the mortgagee cannot prove its right to foreclose or to collect on the mortgage, foreclosure shall be stayed and the bank of the State of Hawaii may offer to buy the property from the owner-occupant for a sum not exceeding 75% of the principal balance due on the mortgage loan.  The bank of the State of Hawaii can then rent or sell the property back to the owner-occupant at a fair price on reasonable terms.

Arizona Senate Bill 1451, which just passed the Senate Banking Committee 6 to 0, would do something similar for homeowners who are current on their payments but whose mortgages are underwater (exceeding the property’s current fair market value).  Martin Andelman callsthe bill a “revolutionary approach to revitalizing the state’s increasingly water-logged housing market, which has left over 500,000 ofArizona’s homeowners in a hopelessly immobile state.”

The bill would establish an Arizona Housing Finance Reform Authority to refinance the mortgages of Arizona homeowners who owe more than their homes are currently worth.  The existing mortgage would be replaced with a new mortgage from AHFRA in an amount up to 125% of the home’s current fair market value. The existing lender would get paid 101% of the home’s fair market value, and would get a non-interest-bearing note called a “loss recapture certificate” covering a portion of any underwater amounts, to be paid over time.  The capital to refinance the mortgages would come from floating revenue bonds, and payment on the bonds would come solely from monies paid by the homeowner-borrowers. An Arizona Home Insurance Fund would create a cash reserve of up to 20 percent of the bond and would be used to insure against losses. The bill would thus cost the state nothing.

Critics of the Arizona bill maintain that it shifts losses from collapsed property values onto banks and investors, violating the law of contracts; and critics of the Hawaii bill maintain that the state bank could wind up having paid more than market value for a slew of underwater homes. An option that would avoid both of these objections is one suggested by Michael Sauvante of the Commonwealth Group, discussed earlierhere: the state or county could exercise its right of eminent domain on blighted, foreclosed and abandoned properties.  It could offer to pay fair market value to anyone who could prove title (something that with today’s defective title records normally can’t be done), then dispose of the property through a publicly-owned land bank as equity and fairness dictates.  If a bank or trust could prove title, the claimant would get fair market value, which would be no less than it would have gotten at an auction; and if it could not prove title, it legally would have no claim to the property.  Investors who could prove actual monetary damages would still have an unsecured claim in equity against the mortgagors for any sums owed.


Rhode Island Next?

As the housing crisis lingers on with little sign of relief from the Feds, innovative state and local solutions like these are gaining adherents in other states; and one of them is Rhode Island, which is in serious need of relief.  According to The Pew Center on the States, “The country’s smallest state . . . was one of the first states to fall into the recession because of the housing crisis and may be one of the last to emerge.”

Rhode Islanders are proud of having been first in a number of more positive achievements, including being the first of the 13 original colonies to declare independence from British rule.  A state bank presentation was made to the president of the Rhode Island Senate and other key leaders earlier this month that was reportedly well received.  Proponents have ambitions of making Rhode Island the first state in this century to move its money out of Wall Street into its own state bank, one owned and operated by the people for the people.

Ellen Brown is an attorney and president of the Public Banking Institute,  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back.  Her websites are and

Ellen Brown is a frequent contributor to Global Research.  Global Research Articles by Ellen Brown

© Copyright Ellen Brown 2012

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.

Financial Force Majeure

Financial Force Majeure: The Virtual World Taylored to Our Real World

If any of you have ever played the virtual reality game, Sim City or any similar, you will probably appreciate the point to be made more immediately than those unfamiliar. For the unfamiliar, this is a game in which you are the master of the land, tasked with taking what amounts to any empty field and building, expanding, and developing yourself a thriving metropolis.

This entails tapping into the natural resources that are available within your splotch of land, thereby harnessing those resources to grow your community. As master of your domain, you have to the politician, the banker, the shopkeeper too, making wise decisions with your electronic currency inasmuch as budgeting and investment are concerned. You have to provide the infrastructure, exploiting what resources you have to attract more Sims (the inhabitants of your city) to further grow your town.

You zone the land for residential, commercial, and industrial zones and providing for greenbelt, park, and recreational zones. You build schools, banks, retail and shopping centers, single-family and multi-family residential, industrial, and hospitals. As in the real world, this is done through various types of investment deals in the both the private and public sectors, involving commercial and investment banks, private investors and businesses. Your metropolis’ success depends on good investment strategies.

Mother Nature is an ever present threat, just as in the real world, throwing a natural disaster your way now and again. Of course, disaster strikes when least expected, testing the validity of your decisions, most of all your infrastructure. It is than you discover if value engineering the levy walls was such a good idea. Should news of cutting corners for costs leaks out, it costs your city, as restitution to flood victims is yours to bear.

Of course, the entirety is based on a designed program consisting of a language, codes, and locks. As with any program there savvy programmers, some might say hackers, having the learned knowledge to manipulate codes, language, and changing locks or even to remove locks. Purposes in hacking games might be to expand the games capabilities or to be able to be able to skip ahead to more advanced levels without having to play through the levels not desired.

Virtual reality games are rooted in fantasy, even if based on real situations, there is no tangible result. Emotional personal satisfaction or perhaps of monetary award if in some sort of competition is the best reward one can hope for. You can’t physically walk the streets of your city, go to one of its schools, or benefit from the investment dividends in terms of attaining real dollars.

For the developers, the tangible aspects are realized by sales which return in real dollars to the owners of the rights to the game. The developers might not necessarily be the owners either, depending on whether the developers retain rights or assigned them away to another.

The point to take away from this little piece is more of a question. What if, with highly sophisticated programming, it was possible to design investment strategies, for instance and than somehow apply them to the real world? What if it has already been done…..What if our whole entire economy has been modeled in the virtual world, brought forth into the real world?

Sound ridiculous? ………think again…….



US Patent Pub. No.: US 2002/0188760 Al



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US Patent Pub. No.: US 2005/0021472 Al



US Patent Pub. No.: US 2003/0187768 A1












What we need to do is take a survey, the population being made up of mortgage borrowers between the years 2002-2008. Why these years would become apparent with the results, which can be predicted before ever tallying the results. It would be a one question survey:

“Upon loan origination, was it required, in addition to completing a loan 1003 loan application, that you also provide specific documents for verification and loan qualification purposes, or did you simply have to complete a loan 1003 loan application?”

My bet would be that most everyone who was in receipt of a loan prior to September 2005 was required to submit documents to a human person which were used to verify loan qualification. Most nearly everyone subsequent that date was not required to submit anything by way of supporting documents.

This gives us two separately defined groups:

GROUP A: borrowers whose loans were humanly underwritten and verified

GROUP B: borrowers whose loans were underwritten entirely by automation

We can argue about the underlying reasons for economic collapse all day long, as there are certainly many, but one fact remains as being integral. This is acknowledging that there were borrowers that never, ever should have been approved for a loan, yet were. It was this very small subset of borrowers in Group B however, those that defaulted nearly immediately, that is within the first through third months out of the gate. It was these ‘early payment defaults (EPD’s ) that spread throughout the investment community causing fear, bringing into question the quality of all loan originations, thereby freezing the credit markets in August 2007, a year later the entire economy collapsed.

Of course, it is much more complex than that, but the crucial piece that provided the catalyst was these EPD’s. It was the quality of the borrowers from these EPD’s that became the model by which was used to stigmatize all borrowers. What was needed was a fall guy, to first lessen the anger towards the bailouts in providing a scapegoat, and second to divert attention away from the facts underlying the lending standards the failed and/or intentionally purposeful failure of the automation. From my research, it was with purposeful intent come hell or high water is my mission in life to bring forth into the public light.

Putting intent aside for the moment and just focusing on the EPD’s and the domino effect they caused which resulted in millions of borrowers, from both Groups A and B, to lose their homes or struggling to hold on. How could one small group of failed borrowers affect millions of other borrowers, especially those who were qualified through the traditional methods of underwriting?

The answer is an obvious one, coming down to the one common element that is the structuring of the loan products, that as it relates to the reset. Anyone whose reset occurred just prior and certainly after the economic collapse was as the saying goes…..Screwed. It is within is this, that the Grand Illusion lay intentionally concealed and hidden. It is within the automation wherein all the evidence clearly points to the fact that a mortgage is not a mortgage but rather a basket of securities….Not just any securities, but debt defaultable securities. In other words, it was largely planned to intentionally give loans to those whom were known to result in default.

But, even without understanding any of the issues as to the ‘basket of securities” there is one obvious point that looms, hiding in plain sight, which I believe should be completely exploited. This as it directly relates to our mortal enemy, that which takes the name of MERS. I know there are those that disseminate the structure of Mortgage Electronic Registration Systems, Inc and Merscorp as it relates to the MIN number and want to pick it apart, and all this is well and good. However, they miss the larger and more obvious point that clearly gives some definition.

There is one particular that every one of those millions upon millions of borrowers, those in both Group A and Group B along with the small subset of Group B, all have in common. ……MERS. MERS was integrated into every set of loan documents, slide past the borrowers without explanation without proper representation in concealing the implied contracts behind the trade and service mark of MERS.

MERS does not discriminate between a good or a bad loan, a loan is a loan as far it is concerned, whether it was fraudulently underwritten or perfectly underwritten. If it is registered with MERS the good, the bad, the ugly all go down, and therein lays an issue that is pertinent to discussion.

MERS was written into all Fannie and Freddie Uniform Security Instrument, not by happenstance, rather mandated by Fannie and Freddie. It was they who crafted verbiage and placement within the document. Fannie and Freddie are of course agency loans, however nearly 100% of non-agency lenders utilized the same Fannie and Freddie forms. Put into context, MERS covers both agency and non-agency, and not surprisingly members of MERS as well. Talk about fixing the game!!

It would seem logical, considering we, the American Taxpayer own Fannie Mae, that we should be entitled some answers to some very basic questions……The primary question: If Fannie Mae and Freddie Mac mandated that MERS play the role that it does, why than were there no quality control measures in place, and should they not have been responsible for putting in some safety measures in place?

The question is a logical one; any other business would have buried in litigation had a product it sponsored or mandated, as the case may be here, resulted in complete failure. From the standpoint of public policy, MERS was a tremendous failure. Why? The answer derives itself from the facts as laid out above regarding the underwriting processes and the division of borrowers: Group A and B.

This becomes a pertinent taking into account Fannie Mae on record in its recorded patents.

US PATENT #7,881,994 B1– Filed April 1, 2004, Assignee: Fannie Mae

 ‘It is well known that low doc loans bear additional risk. It is also true that these loans are

charged higher rates in order to compensate for the increased risk.’


System and method for processing a loan

US PATENT # 7,653,592– Filed December 30, 2005, Assignee: Fannie Mae

The following from the Summary section states:

‘An exemplary embodiment relates to a computer-implemented mortgage loan application data processing system comprising user interface logic and a workflow engine. The user interface logic is accessible by a borrower and is configured to receive mortgage loan application data for a mortgage loan application from the borrower. The workflow engine has stored therein a list representing tasks that need to be performed in connection with a mortgage loan application for a mortgage loan for the borrower. The tasks include tasks for fulfillment of underwriting conditions generated by an automated underwriting engine. The workflow engine is configured to cooperate with the user interface logic to prompt the borrower to perform the tasks represented in the list including the tasks for the fulfillment of the underwriting conditions. The system is configured to provide the borrower with a fully-verified approval for the mortgage loan application. The fully-verified approval indicates that the mortgage loan application data received from the borrower has already been verified as accurate using information from trusted sources. The fully-verified approval is provided in a form that allows the mortgage loan application to be provided to different lenders with the different lenders being able to authenticate the fully-verified approval status of the mortgage loan application’

Computerized systems and methods for facilitating the flow of capital

through the housing finance industry

US PATENT # 7,765,151– Filed July 21, 2006, Assignee: Fannie Mae

The following passages taken from patent documents reads:

‘The prospect or other loan originator preferably displays generic interest rates (together with an assumptive rate sheet, i.e., current mortgage rates) on its Internet web site or the like to entice online mortgage shoppers to access the web site (step 50). The generic interest rates (“enticement rates”) displayed are not intended to be borrower specific, but are calculated by pricing engine 22 and provided to the loan originator as representative, for example, of interest rates that a “typical” borrower may expect to receive, or rates that a fictitious highly qualified borrower may expect to receive, as described in greater detail hereinafter. FIG. 2b depicts an example of a computer Internet interface screen displaying enticement rates.’

 ’If the potential borrower enters a combination of factors that is ineligible, the borrower is notified immediately of the ineligibility and is prompted to either change the selection or call a help center for assistance (action 116). It should be understood that this allows the potential borrower to change the response to a previous question and then continue on with the probable qualification process. If the potential borrower passes the eligibility screening, the borrower then is permitted to continue on with the probable qualification assessment.’

‘Underwriting engine 24 also determines, for each approved product, the minimum amount of verification documentation (e.g., minimum assets to verify, minimum income to verify), selected loan underwriting parameters, assuming no other data changes, (e.g., maximum loan amount for approval, maximum loan amount for aggregating closing costs with the loan principal, and minimum refinance amount), as well as the maximums and minimums used to tailor the interest rate quote (maximum schedule interest rate and maximum number of points) and maximum interest rate approved for float up to a preselected increase over a current approved rate. It should be appreciated that this allows the potential borrower to provide only that information that is necessary for an approval decision, rather than all potentially relevant financial and other borrower information. This also reduces the processing burden on system.’

The two patents above was Fannie Mae’s means of responding to its competition, that being the non-agency who had surpassed the agencies in sales volume (those stats I will have to dig up and repost as they are not handy at the moment), as the non-agencies had dropped all standards back in and around September 2005.

The point being though, Fannie Mae and Freddie Mad were the caretakers of MERS, so to speak, inasmuch as mandating MERS upon the borrowers. Had there been safety measures in place that caught the fact that the loans that were dumping out quickly, that is the EPD’s, there might have been a stoppage in place, thereby preventing MERS from executing foreclosures upon every successive mortgage.

I know that this is all BS though, because it is a cover up, a massive one that cuts into the heart of the United States government. This is perhaps one avenue by which to get there, as the questions asked are easily understood, as opposed to digging into the automation processes which people apparently are not ready to accept as of yet.

Prototype of Standardized Monthly Mortgage Statement is Released, by Jim Puzzanghera, Los Angeles Times

The Consumer Financial Protection Bureau‘s proposed statement is designed to provide clear information about the loan on a single page and wouldn’t change each time your loan is sold to a new servicer.



Reporting from Washington—

Your monthly mortgage bill soon could get easier to understand, and it wouldn’t change each time your loan is sold to a new servicer.

The Consumer Financial Protection Bureau has developed a proposed standardized mortgage servicer statement designed to provide clear information about the loan on a single page.

The prototype released Monday included a breakdown of how much of the monthly payment went to principal, interest and escrow. The form also detailed the outstanding principal, maturity date, prepayment penalty and, for adjustable-rate mortgages, the time when the interest rate could change.

“This information will help consumers stay on top of their mortgage costs and hold their mortgage servicers accountable for fixing errors that crop up,” said Richard Cordray, the agency’s director. “Given the widespread mortgage servicing problems we’ve seen over the past few years, consumers need clear disclosures they can count on.”

Although many servicers already provide such information on their monthly statements, there are no industrywide standards, the agency said.

Such standards are a good idea, and initial reaction from servicers to the agency’s proposal was positive, said Rod J. Alba, senior counsel in the mortgage markets division at the American Bankers Assn.

The agency posted a working draft of the standardized statement on its website, to solicit input from the public and industry before a version of the form formally is proposed this summer.

Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group, said simplified mortgage statements would help resolve the broad mortgage servicing problems that were at the heart of last week’s federal and state settlement with five of the nation’s largest banks over botched foreclosure paperwork.

The consumer agency is required under the 2010 financial reform law to put new mortgage servicing rules in place to help consumers, Cordray said. The law has specific requirements for mortgage statements, including a phone number and email address for the customer to get information about the loan, as well as information about housing counselors.

The new mortgage statement is the latest consumer financial paperwork the agency is trying to simplify.

In May, it released two prototypes for shorter, easier-to-understand disclosure forms that lenders would have to give home buyers before they close on a mortgage. The agency has been receiving comments on the forms and tested them last month in Philadelphia.

And in December, the agency proposed a simplified credit card agreement form to make it easier to understand interest rate terms and comparison shop.

The agency also is developing a new disclosure rule for hybrid adjustable-rate mortgages that would require consumers to be notified months before their first interest rate increase, as well as to be provided with a good-faith estimate of the new monthly payment.

Short Sale Listing: 2710 SW OLD ORCHARD RD, Portland Or. $695,000

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via Short Sale Listing: 2710 SW OLD ORCHARD RD, Portland Or. $695,000.

Has Housing Really Bottomed?

Massive intervention by Federal agencies and the Federal Reserve have kept the market from discovering price and the risk premium in real estate. That sets up a “catch the falling knife” possibility for impatient real estate investors.


A substantial percentage of many households’ net worth is comprised of the equity in their home. With the beating home prices have taken since 2007, existing and soon-to-be homeowners are keen to know: Are prices stabilizing? Will they begin to recover from here? Or is the “knife” still falling?

To understand where housing prices are headed, we need to understand what drives them in the first place: policy, perception, and price discovery.

In my December 2011 look at housing, I examined systemic factors such as employment and demographics that represent ongoing structural impediments to the much-awaited recovery in housing valuations and sales. This time around, we’re going to consider policy factors that influence the housing market.

Yesterday while standing in line at our credit union I overheard another customer at a teller’s window request that her $100,000 Certificate of Deposit (CD) be withdrawn and placed in her checking account because, she said, “I’m not earning anything.” The woman was middle-aged and dressed for work in a professional white- collar environment — a typical member, perhaps, of the vanishing middle class.

Sadly, she is doing exactly what Ben Bernanke’s Federal Reserve policies are intended to push people into doing: abandoning capital accumulation (savings) in favor of consumption or trying for a higher yield in risk assets such as stocks and real estate.

It may strike younger readers as unbelievable that a few decades ago, in the low-inflation 1960s, savings accounts earned a government-stipulated minimum yield of 5.25%, regardless of where the Fed Funds Rate might be. Capital accumulation was widely understood to be the bedrock of household financial security and the source of productive lending, whether for 30-year home mortgages or loans taken on to expand an enterprise.

How times — and the US economy — have changed.

Now the explicit policy of the nation’s private central bank (the Federal Reserve) and the federal government’s myriad housing and mortgage agencies is to punish saving with essentially negative returns in favor of blatant speculation with borrowed money. Official inflation is around 3% and savings accounts earn less than 0.1%, leaving savers with a net loss of about 3% every year.  Even worse — if that is possible — these same agencies have extended housing lenders trillions of dollars in bailouts, backstops and guarantees, creating institutionalized moral hazard on an unprecedented scale.

Recall that moral hazard simply means that the relationship between risk and return and has been severed, so risk can be taken in near-infinite amounts with the assurance that if that risk blows up, the gains remain in the hands of the speculator. Another way of describing this policy of government bailouts is “profits are private but losses are socialized.” That is, any profits earned from risky speculation are the speculator’s to keep, while all the losses are transferred to the public.

While the housing bubble was most certainly based on a credit bubble enabled by lax oversight and fraudulent practices, the aftermath can be fairly summarized as institutionalizing moral hazard.

Policy as Behavior Modification and Perception Management

Quasi-official pronouncements by Fed Board members suggest that the Fed’s stated policy of punishing savers with a zero-interest rate policy (ZIRP) is outwardly designed to lower the cost of refinancing mortgages and buying a house. The first is supposed to free up cash that households can then spend on consumption, thereby boosting the economy. With savings earning a negative yield, consuming more becomes a tangibly attractive alternative. (How keeping the factories in Asia humming will boost the American economy is left unstated.)

This near-complete destruction of investment income from household savings yields a rather poor return. Plausible estimates of the total gain that could be reaped by widespread refinancing hover around $40 billion a year, which is not much in a $15 trillion economy.

There are real-world limits on this policy as well. Since the Fed can’t actually force lenders to refinance underwater mortgages, millions of homeowners are unable to take advantage of lower rates. From the point of view of lenders, declining household incomes and mortgages that exceed the home value (so-called negative equity) have lowered the creditworthiness of many homeowners.

As a result, the stated Fed policy goal of lowering mortgage payments to boost consumer spending has met with limited success. Somewhat ironically, the mortgage industry’s well-known woes — extended time-frames for involuntary foreclosure, lenders’ hesitancy to concede to short sales (where the house is sold for less than the mortgage and the lender absorbs a loss), and strategic/voluntary defaults — may be putting an estimated $80 billion in “free cash” that once went to mortgages into defaulting consumer’s hands.

The failure of the Fed’s policies to increase household’s surplus income via ZIRP leads us to the second implicit goal, lowering the cost of home ownership via super-low mortgage rates, which serves both as behavior modification and perception management. If low-interest rate mortgages and subsidized Federal programs that offer low down payments drop the price of home ownership below that of renting an equivalent house, then there is a substantial financial incentive to buy rather than rent.

The implicit goal is to shape a general perception that the bottom is in, and it’s now safe to buy housing.

First-time home buying programs and FHA (Federal Housing Authority) and VA (Veterans Administration) loans all offer very low down-payment options to qualified buyers. This extends a form of moral hazard to buyers as well as lenders: If a buyer need only scrape up $2,000 to buy a house, their losses are limited should they default to this same modest sum. Meanwhile, lenders working under the guarantee of FHA- and VA-backed loans are also insured against losses.

The Fed’s desire to boost home sales by any means available is transparent. By boosting home sales, it hopes to stem the decline of house valuations and thus stop the hemorrhaging of bank losses from writing down impaired loan portfolios, and also stabilize remaining home equity for households, which has shrunk to a meager 38% of housing value.

As many have noted, given that about 30% of all homes are owned free and clear, the amount of equity residing in the 70% of homes with a mortgage may well be in the single digits. (Data on actual equity remaining in mortgaged homes is not readily available, and would be subject to wide differences of opinion on actual market valuations.)

Broadly speaking, housing as the bedrock of middle class financial security has been either destroyed (no equity) or severely impaired (limited equity).  The oversupply of homes on the market and in the “shadow inventory” of defaulted/foreclosed homes awaiting auction has also impaired the ability of homeowners to sell their property; in this sense, any remaining equity is trapped, as selling is difficult and equity extraction via HELOCs (home equity lines of credit) has, for all intents and purposes, vanished.

The Fed’s strategy, in conjunction with the government-owned and -operated mortgage agencies that own or guarantee the majority of mortgages in the US (Fannie Mae, Freddie Mac, FHA, and the VA), is to stabilize the housing market through subsidizing the cost of mortgage borrowing by shifting hundreds of billions of dollars out of savers’ earnings with ZIRP.

Since roughly 60% of households either already own a home or are ensnared in the default/foreclosure process, then the pool of buyers boils down to two classes: buyers who would be marginal if not for government subsidies and super-low mortgage rates, and investors seeking some sort of return above that of US Treasury bonds. The Fed has handed investors two choices to risk a return above inflation: equities (the stock market) or real estate. Given the uneven track record of stocks since the 2009 meltdown, it is not much of a surprise that investors large and small have been seeking “deals” in real estate as a way to earn a return.

Recent data from the National Association of Realtors concludes that cash buyers (a proxy for investors) accounted for 31% of homes sold in December 2011. Even in the pricey San Francisco Bay Area, where median prices are still in the $350,000 range, investors accounted for 27% of all sales. Absentee buyers (again, a proxy for investors) paid a median price of around $225,000, substantially lower than the general median price.

This data suggests that “bargain” properties are being snapped up for cash, either as rental properties or in hopes of “flipping” for a profit after some modest cleanup and repair.

Price and Risk Premium Discovery

There is one lingering problem with the Fed and the federal housing agencies’ concerted campaigns to punish capital accumulation, push investors into equities or real estate, and subsidize marginal buyers to boost sales at current valuations. The market cannot “discover” price or establish a risk premium when the government and its proxies are, in essence, the market.

By some accounts, literally 99% of all mortgages in the U.S. are government-issued or -guaranteed. If any other sector was so completely owned by the federal government, most people would concede that it was a socialized industry. Yet we in the US maintain the fiction of a “free market” in mortgages and housing.

To establish a truly free and transparent market for mortgages and housing, we would have to end all federal subsidies and guarantees/backstops, and restore the market as sole arbiter of interest rates — i.e., remove that control from the Federal Reserve.

Everyone with a stake in the current market fears such a return to an open market because it is likely that prices would plummet once government subsidies, guarantees, and incentives were removed. Yet without such an open market, buyers can never be certain that price and risk have truly been discovered. Buyers in today’s market may feel that the government has removed all risk from buying, but they might find that they “caught the falling knife;” that is, bought into a false bottom in a market that has yet to reach transparent price discovery.

So, the key question still remains for anyone who owns a home or is looking to soon own one…how close are we to the bottom in housing prices?

In Part II: Determining the Housing Bottom for Your Local Market, we tackle that question head-on. Because local dynamics inevitably play such a large role in determining fair pricing for any given market, instead of giving a simple forecast, we instead offer a portfolio of tools and other resources for analyzing home values on a local basis. Our goal is to empower readers to calculate an informed estimate of “fair value” for their own markets — and then see how closely current local real estate prices fit (or deviate) from it.

Click here to access Part II of this report (free executive summary, enrollment required for full access).

This article was originally published on

Fannie, Freddie overhaul unlikely, by Vicki Needham,

An overhaul of Fannie Mae and Freddie Mac is unlikely again this year despite recent Republican efforts to move the issue up the agenda.

Congressional Republicans, along with some Democrats — and even GOP presidential candidate Newt Gingrich — are renewing calls to craft an agreement to reduce the involvement of Fannie and Freddie in the nation’s mortgage market.

But without a broader accord, passage of any legislation this year is slim, housing experts say.


Jim Tobin, senior vice president of government affairs for the National Association of Home Builders, concedes that despite a mix of Democratic and Republican proposals, including a push by the Obama administration last year, congressional leaders probably won’t get far this year on a plan for Fannie and Freddie, the government-controlled mortgage giants.


Tobin said there are “good ideas out there” and while he expects the House to put some bills on the floor and possibly pass legislation, the Senate is likely to remain in oversight mode without any “broad-based legislation on housing finance.”

“We’re bracing for a year where it’s difficult to break through on important policy issues,” he said this week.

While the issue makes for a good talking point, especially in an presidential election year, congressional efforts are largely being stymied by the housing market’s sluggish recovery, prohibiting the hand off between the government and private sector in mortgage financing, housing experts say.

David Crowe, chief economist with NAHB, said that the market has hit rock bottom and is now undergoing a “slow climb out of the hole.”

The House has taken the biggest steps so far — by mid-July the Financial Services Committee had approved 14 bills intended to jump-start reform of the government-sponsored enterprises.

“As we continue to move immediate reforms, our ultimate goal remains, to end the bailout of Fannie, Freddie and build a stronger housing finance system that no longer relies on government guarantees,” panel Chairman Spencer Bachus (R-Ala.) said last summer.

Meanwhile, a number of GOP and bipartisan measures have emerged — Democrats and Republicans generally agree Fannie and Freddie are in need of a fix but their ideas still widely vary.

There are a handful of bills floating around Congress, including one by Reps. John Campbell (R-Calif.) and Gary Peters (D-Mich.), and another by Reps. Gary Miller (R-Calif.) and Carolyn Maloney (D-N.Y), which would wind down Fannie and Freddie and create a new system of privately financed organizations to support the mortgage market.

“Every one of those approaches replaces them [Fannie and Freddie] with what they think is the best alternative to having a new system going forward that would really fix the problem and would really give certainty to the marketplace and allow housing finance to come back, and therefore housing to come back, as well,” Campbell said at a markup last month.

There’s another bill by Rep. Jeb Hensarling (R-Texas) and bills in the Senate being pushed by Sens. Bob Corker (R-Tenn.) and Johnny Isakson (R-Ga.).

Corker, a member of the Senate Banking Committee, made the case earlier this week for unwinding government support for the GSEs while promoting his 10-year plan that would put in place the “infrastructure for the private sector to step in behind it.”

“A big part of the problem right now is the private sector is on strike,” Corker said.

He has argued that his bill isn’t a silver bullet, rather a conversation starter to accelerate talks.

“So what we need to do is figure out an orderly wind-down,” Corker said in November. “And so we’ve been working on this for some time. We know that Fannie and Freddie cannot exist in the future.”

He suggested getting the federal government this year to gradually wind down the amount of the loans it guarantees from 90 percent to 80 percent and then to 70 percent.

“And as that drops down, we think the market will send signals as to what the difference in price is between what the government is actually guaranteeing and what they’re not,” he said.

Even Gingrich, who has taken heat for his involvement with taking money while doing consulting work for the GSEs, called for an unwinding during a December interview.

“I do, in fact, favor breaking both of them up,” he said on CBS’ Face the Nation. “I’ve said each of them should devolve into probably four or five companies. And they should be weaned off of the government endorsements, because it has given them both inappropriate advantages and because we now know from the history of how they evolved, that they abused that kind of responsibility.”

In a white paper on housing last week, the Federal Reserve argued that the mortgage giants should take a more active role in boosting the housing market, although they didn’t outline suggestions for how to fix the agencies.

The central bank did argue that “some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

Nearly a year ago, Treasury Secretary Timothy Geithner asked Congress to approve legislation overhauling Fannie Mae and Freddie Mac within two years — that deadline appears to be in jeopardy.

The Obama administration’s initial recommendations called for inviting private dollars to crowd out government support for home loans. The white paper released in February proposed three options for the nation’s housing market after Fannie and Freddie are wound down, with varying roles for the government to play.

About the same time last year, Bachus made ending the “taxpayer-funded bailout of Fannie and Freddie” the panel’s first priority.

While an overhaul remains stalled for now there is plenty of other activity on several fronts.

In November, the Financial Services panel overwhelmingly approved a measure to stop future bonuses and suspend the current multi-million dollar compensation packages for the top executives at the agencies.

The top executives came under fire for providing the bonuses but argued they need to do something to attract the talent necessary to oversee  $5 trillion in mortgage assets.

Earlier this month, the Federal Housing Finance Agency announced that the head of Fannie received $5.6 million in compensation and the chief executive of Freddie received $5.4 million.

Under the bill, the top executives of Fannie and Freddie could only have earned $218,978 this year.

Last week, Fannie’s chief executive Michael Williams announced he would step down from his position once a successor is found. That comes only three months after Freddie’s CEO Charles Haldeman Jr. announced that he will leave his post this year.

The government is being tasked to find replacements, not only for the two mortgage giants which have cost taxpayers more than $150 billion since their government takeover in 2008, but there is talk that the Obama administration is looking to replace FHFA acting director Edward DeMarco, the overseer of the GSEs.

In a letter to President Obama earlier this week, more than two dozen House members said DeMarco simply hasn’t done enough to help struggling homeowners avoid foreclosure.

The lawmakers are pushing the president to name a permanent director “immediately.”

Also, in December, the Securities and Exchange Commission (SEC) sued six former executives at Fannie and Freddie, alleging they misled the public and investors about the amount of risky mortgages in their portfolio.

In the claims, the SEC contends that as the housing bubble began to burst, the executives suggested to investors that the GSEs were not substantially exposed to sub-prime mortgages that were defaulting across the country.

Mortgage Slang 101 – Mortgage Insurance, Brett Reichel,

Mortgage insurance is viewed nearly universally as a bad thing, but in reality, it’s a tool to be used that is very good for home buyers, the housing market and the economy in general.

Why do many complain about mortgage insurance?  Because it’s expensive, and sometimes difficult to get rid of when it’s no longer necassary.  If that’s the case, why do I say it’s good for buyers and the economy?  Because it’s a tool that allows people to buy a home with less than twenty percent down.

Mortgage insurance insures the lender against the risk of the buyers default on the loan.  It does NOT insure the buyers life, like many people think.

The single biggest hurdle for home buyers is accumulating an adequate down payment.  Lenders want buyers to put twenty percent down for two reasons.  First, a buyer with a large down payment is less likely to quit making their payments.  Second, if a buyer does default, the more the buyer put down usually means more equity in the house when the lender forecloses, which means the lender loses less money.

But, if a buyer wants to buy a $200,000 and has to put up a twenty percent down, that will equal a $40,000 down payment!  Hard to save up, for most buyers.  BUT, with the use of mortgage insurance, that buyer might be able to put as little as $6,000 down!  A lot easier to save.

So, mortgage insurance can be a very benficial tool.

With that being said, don’t let your lender shoehorn you into only considering monthly mortgage insurance.  There are other options such as single premium mortgage insurance, or “split” mortgage insurance.  These programs can be more expensive up front, but sometimes much less expensive over time.  They don’t work for everyone, but they certainly should be looked into.


Brett Reichel

Mortgage Guaranty Insurance — Market Collapsing, Insurers Next?, by Gavin Magor,

This week, President Obama announced that the Federal Housing Finance Agency (FHFA) would be extending the Home Affordable Refinance Program (HARP) to an estimated additional one million homeowners.  In practice what this means is that homeowners that have a Fannie Mae (OTCBB: FNMA) or Freddie Mac (OTCBB: FMCC) backed loan and owe more than 125% of the value of their home may qualify for a restructuring.

Mortgage insurers were pummeled by claims in the first half of the year, losing $2.4 billion in the six months through June–$618 million in the first quarter plus another $1.7 billion in the second quarter. The third-quarter numbers are not yet available; however, with no sign of significant improvement in the economy for the remainder of the year it appears that 2010 losses will be matched in 2011.


Gavin Magor, senior financial analyst at Weiss Ratings, has more than 25 years of international experience in credit-risk management, insurance, commercial lending and analysis. He leads the firm’s insurance ratings division and developed the methodology for Weiss’ Sovereign Debt Ratings.


Given the state of the mortgage guaranty market, will the insurers even be there to support these loans, or more broadly, any loans?

The mortgage guaranty industry is dominated by six insurance groups.  Subsidiaries of MGIC Investment Corporation (NYSE: MTG), Radian Group (NYSE: RDN), Genworth Financial (NYSE: GNW), PMI Group (NYSE: PMI), American International Group (NYSE: AIG) and Old Republic International Corporation (NYSE: ORI) wrote 93% of the $4.4 billion of premiums in 2010 with just five companies writing 80% of the total.

These same companies also recorded $1.7 billion or 71% of the combined $2.4 billion losses.  United Guaranty Residential Insurance Co (an AIG subsidiary) is the only large insurer that recorded a profit during 2010 and for the first two quarters of 2011.  Mortgage Guaranty Insurance Corp (MGIC) recorded a profit in 2010 after reserve adjustments.

Mortgage Insurance Companies of America, a group representing the major mortgage insurers, reports that new insurance written increased each month from April through August. It is this business that reflects an improved borrower profile according to the insurers and is expected to perform better than the pre-2008 policies.

On the downside, it reports that primary defaults have increased each month since March and the cure rate, reflecting the resolution of defaults, has declined as many months as it has improved, but the trend is down. A report from RealtyTrac on October 13 reported that first-time defaults rose 14% between July and September 2011 over the prior quarter.  Consequently, in-force insurance declined on a month-by-month basis, since February, down a total of $27.1 billion or 4.4% to $598.6 billion at the end of August.

Earned premiums dropped 7.9% during 2010, with the larger insurers dropping 9.1%.  With $3.5 billion out of the $4.4 billion of premiums earned by the largest insurers, only Radian Guaranty Inc experienced a rise in premiums, increasing 3.5%.  The remainder experienced declines anywhere from 6.4% to 21.6%.  

Capital and surplus reported by mortgage insurers dropped 7% from the first to second quarters of 2011, and $1 billion or 13% since December 2010. Assets declined $608 million or 2.3% between March and June.

Two substantial groups, PMI and Old Republic, wrote 24.6% of 2010 earned premiums but were forced to effectively withdraw from the market at the end of the third quarter of 2011. Two PMI subsidiaries were placed into receivership by the state insurance regulator.  One, PMI Mortgage Insurance Company, recorded 11.6% of the total mortgage premiums earned in 2010.

The market for mortgage guaranty paper has therefore shrunk. The line of business is not profitable at this stage for the majority of insurers. The concern is that the losses will continue to grow and, with limited growth in real estate sales requiring mortgage insurance, there will be additional withdrawals from the market and or potential failures.

Two of the largest mortgage insurers are Mortgage Guaranty Insurance Corporation (MGIC), a subsidiary of Mortgage Guaranty Insurance Corp. and Genworth Mortgage insurance Corporation (Genworth), a subsidiary of Genworth Financial Inc.  These two companies, ranking first and third respectively in market share, hold 35% of the market with Radian sandwiched in between. 

Despite the apparent similarities, they could not have more disparate approaches and confidence in the mortgage guaranty market. Both companies write only one line of business and both increased their market penetration in 2010, but the similarities end there.  MGIC represents 72% of the assets of its parent while Genworth only represents 2.5% of its parent and thus  is not the major focus of the group. This difference in relevance within each group is demonstrated in the contrasting approaches to the current market difficulties.

  1. MGIC slightly increased its market penetration during 2010, from 22.9% to 23.1%, despite a 7.3% fall in earned premiums from $1.1 billion to $1.02 billion. This increase did not translate into profits however. Only a $619 million release ofclaims reserves prevented a loss in 2010.  It’s noteworthy though that MGIC was profitable for each of the “Great Recession” years of 2007 to 2009.
  2. Although MGIC recognizes that the loan origination market is not growing, it contends that it is positioned to operate in the restricted market and that it is sufficiently capitalized to take advantage of the better quality business now available.
  3. Like MGIC, Genworth slightly increased its market penetration during 2010, from 11.7% to 11.9%, despite a 6.4% fall in earned premiums from $558.2 million to $522.6 million. Unlike MGIC it recorded losses in each of the years from 2008 to 2010.
  4. On the other hand, Genworth sees that the future of the mortgage insurance market lies in the regulatory and legislative actions taken to change the real estate market. It recognizes that there could be some industry consolidation.

What these two insurers appear to be demonstrating clearly is that whether the mortgage guaranty business is core to a group or not the odds are currently stacked against them because of the legacy business. 

Mortgage insurers have traditionally, like most property and casualty insurers, earned substantial income from investments. A drop in investment income should be expected to continue based on the current interest rate environment and bond pricing, drying up this revenue source

The investment dilemma is a challenge for all P&C insurers.  There is a growing reliance on investments for profits; at the same time there are reduced yields in the current investment environment. With unsustainable underwriting losses, insurers must navigate among undesirable alternatives:  1) seeking higher investment returns by purchasing riskier securities; or 2) increasing premiuns at the risk of dampening demand for mortgages

This is another area where MGIC and Genworth have differed. Genworth has increased its junk bond investments from 1.7% of its total portfolio in 2008 to 3.4% in 2010.  This is in line with the general trend among all P&C insurers. MGIC has, on the other hand, reduced its junk holdings which has resulted in an annualized decline of 21% in investment income putting additional pressure on the profitability of the main underwriting business.

Something has to give and, as we saw in the third quarter, both PMI and Old Republic International Corp were forced to stop writing new policies due to insufficient capital.  PMI is on the brink of collapse, and two subsidiaries were seized by the regulator in September. Despite opportunities to write more, and presumably profitable, business with a smaller competitive field it seems reasonable to assume that there will be additional insurers that withdraw from the market, are seized by regulators, or are sold. 

Genworth appears to be a prime example of a company in the wrong place at the wrong time and it could be jettisoned by its parent sooner rather than later.  MGIC on the other hand IS the business and appears to be girding its loins for the fight ahead, hoping that it will be able to successfully get through the unprofitable pre-2008 book of business and emerge stronger, with a profitable book of new business and positioned to take advantage of future recoveries in the housing market.