SOTU: I Think We're Turning Japanese

Jan 26, 2011Mike Konczal

If you listened to Obama's speech, you would think that the recession is over, the financial crisis is taken care of and we can educate out of the rest. You'd be wrong.

If you listened to Obama's speech, you would think that the recession is over, the financial crisis is taken care of and we can educate out of the rest. You'd be wrong.

There are three things you wouldn't have learned from the State of the Union last night. The first is embodied in the chart below. You wouldn't realize that employment is down about 5% from where it was 3 years ago, with millions of people are out of work, dropped out of the labor force, and underemployed. The second is that we have not yet hit the peak rate of foreclosures in this country. Last year 1 million properties were seized; this year an estimated 1.2 million will be seized. The last was that there was a  financial crisis in 2008, steps were taken to remedy it -- including what will be one of the signature legislative acts of the Obama administration -- and the current state of Wall Street is record profits.

Like Jamelle Bouie, I'm surprised by how fast we are moving past the current unemployment crisis. The Obama team has gone from the current to the Future, and must be expecting, or at least hoping, for a turnaround in job creation.

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The speech was well delivered. Although vague, it pointed to a kind of liberal supply-side theory that I think is important to highlight. Indeed, in a non-crisis time it would have been a great vision of the role of government in the economy. But right now we need the government to do different things.

Social Security cuts were not the centerpiece, which reflects excellent activism and writing across many different groups, including Strengthen Social Security, Dean Baker and CEPR, and many others. Though far from over, this is a good first step.

For those who think that better education is the way to get out of this mess, it's worth looking at data (from forthcoming Roosevelt Institute work) on the unemployment rate for 20-24 year olds with a BA (seasonally unadjusted, 4-month moving average):

To put that in words, young people graduating college with large debt loads are entering a brutal job market. Our colleges are no worse than they were in 2007, yet young people are struggling to find work even with strong college investments. Telling the American workforce that they aren't educated enough for the jobs of the future isn't going to actually reconcile with this data.

It's interesting to see how quickly forces are turning this into the new normal, pulling our attention away from the economic crisis. It feels like we are turning Japanese.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Rooseveltian SOTU Suggestions: "Business as a Means to Meet Social Goals"

Jan 25, 2011

As President Obama gets ready for his second State of the Union address tonight, Roosevelt Institute Fellows have some suggestions for the priorities he should set to put the country on the right path -- economically, socially, and morally.

As President Obama gets ready for his second State of the Union address tonight, Roosevelt Institute Fellows have some suggestions for the priorities he should set to put the country on the right path -- economically, socially, and morally.

"I would like to see President Obama express that business is a means to meet social goals rather than an end in itself. I would like to see President Obama demonstrate awareness that the social contract between multinational executives and the American people has broken down and that their prosperity is different than the prosperity of the American people. I would like to see President Obama acknowledge that when he strives for the competitiveness of American business enterprise, the oligopolistic health care industry charges people and citizens far more than what is charged in other countries for drugs, insurance and medical procedures is a cost that hinders our competitiveness. I would like to see President Obama assert that public investment enhances the productivity of the private sector and inspires rather than crowds out private investment in the USA. I would like to see President Obama state that capital gains tax for holdings of stocks in Asian companies is not an incentive to capital formation at home and should be rescinded so that money can be used for an investment tax credit for capital that is deployed only in the 50 United States and not for foreign direct investment or foreign portfolio investment." ~ Robert Johnson, Roosevelt Institute Senior Fellow and Director of the Institute for New Economic Thinking

"I'd like to see President Obama make our jobs crisis his number one priority, while also planning out a future goal of how government can work to create full employment. I'd like to see him talk about defending and expanding, not cutting, the gains made in the health care and financial reform debate of 2010. And to close, the goals I don't expect but would be great are mortgage modification for bankruptcy, reexamining our prison policies, and a curtailment of civil liberty violations." ~ Mike Konczal, Roosevelt Institute Fellow

"As recent statistics show, the total non-institutional civilian labor force (Americans 16 years and older who are not in a institution -- criminal, mental, or other types of facilities -- or on active military duty) is reported as 238.889 million. Of these, we see 139.206 million people employed (58.3% of the labor force) and 14.485 million people unemployed (6.1% of the labor force). Obviously that can't be the total picture -- we're only at 64.4%. This is why there are 8.931 million people part-time employed for economic reasons -- this concerns people who want a full-time job but can't get one -- and 18.184 million people part-time employed for non-economic reasons. Non-economic reasons include school or training, retirement or Social Security limits on earnings, but also childcare problems and family or personal obligations. But the by far largest category 'missing' from both the employed and unemployed statistics is those "Not In Labor Force": 85.2 million people. The BLS definition states: 'A person who did not work last week, was not temporarily absent from a job, did not actively look for work in the previous 4 weeks, or looked but was unavailable for work during the reference week; in other words, a person who was neither employed nor unemployed.' (Clearly, this does include lot of unemployed people). To summarize: 108.616 million people in America are either unemployed, underemployed or "not in the labor force." This represents 45.5% of working-age Americans.  What this suggests is that ALMOST HALF OF ALL AMERICANS have full-time jobs. How much of this is voluntary, Mr. President? Have you ever considered enlisting your team of economic advisers to look at this question? If we had a Job Guarantee program, we could give everyone who wants to work a decent paying job. Under a full employment scenario, GDP growth, deficits and entitlements will never be a problem. Why not use the SOTU to embrace a goal of full employment for the nation?" ~ Marshall Auerback, Roosevelt Institute Senior Fellow

"The Tucson speech was magnificent in large part because it appealed to the best of Americans. It spoke to how Americans should deal with each other. The State of the Union speech should continue that message to the next obvious point... It must be the speech that positions him for the remainder of this term. While the economy cannot be the only topic -- the speech, for example, cannot ignore Afghanistan -- it has to be the main topic." ~ Bo Cutter, Roosevelt Institute Senior Fellow and Director of The Next American Economy (read his full opinion here)

"American businesses have recovered from the recession. They are making record profits. Now its time for American families to fully recover. America's businesses have a responsibility and an obligation to use their record profits to put America's families to work." ~ Richard Kirsch, Roosevelt Institute Senior Fellow

"Like FDR, Obama has more than oratorical talents. He also has teaching talents. We need him to put them to work to counter the bizarre renditions of America's past propagated by the likes of former House Speaker Newt Gingrich, Senator Jim DeMint, Governor Rick Perry, chalk-boarder Glenn Beck, media hound Sarah Palin, and AEI president Arthur C. Brooks... I would press him to go up to the Capitol and speak not just as President and Commander-in-Chief, but as Head Teacher... I would encourage him to recover and project the narrative of American experience that reminds us all that the United States was founded as a Grand Experiment. It is an experiment in freedom, equality, and democracy and in extending those ideals. It is an experiment literally inscribed in American life through the Declaration of Independence, the Constitution and Bill of Rights, the Gettysburg Address, the Four Freedoms, and the innumerable words and songs delivered on the steps of the Lincoln Memorial." ~ Harvey J. Kaye, Rosenberg Professor of Democracy and Justice Studies at the University of Wisconsin-Green Bay and the author of Thomas Paine and the Promise of America (read his full opinion here)

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Detours, Diversions and Delays: Servicers Obstruct Foreclosure Cases

Jan 24, 2011Thomas A. Cox

foreclosure-gavel-150Homeowners and their lawyers waste resources while the banks and their lawyers bide their time. **This is the final part of a three-part series.

foreclosure-gavel-150Homeowners and their lawyers waste resources while the banks and their lawyers bide their time. **This is the final part of a three-part series. Read part 1 here and part 2 here.

As we pursue pre-trial discovery efforts, the servicers' lawyers' hide the ball tactics come into full play. In addition to throwing up unjustifiable objections, they stonewall for months on end in producing documents to which homeowners are undeniably entitled. We recently won a $2,500 sanction award against JPMorgan Chase after the bank stalled for almost a year in producing documents that it was obligated to produce within 30 days of our request.

While the lawyers for servicers are usually graded and paid for how fast they can rush a foreclosure case through the legal system, the rules change in that very small percentage of cases where lawyers show up to represent homeowners. At that point, the servicer is likely to remove the case from the grading system. The servicer's lawyer is also likely to start billing the servicer at an hourly rate. When a case finally gets to a trial list, there are repeated requests from the servicer's lawyer for continuances and delays so that the servicer can put off sending a witness to testify at trial.

Cut and Run

When we confront a servicer with clear proof that it cannot prove its right to a foreclosure, it will seldom pull back and take action to correct the problem. In one recent case where HSBC Bank was the foreclosing plaintiff, we developed clear proof that the note endorsement it was relying upon was signed by a person who had utterly no authority to endorse on behalf of the party from whom HSBC claimed to have acquired the note. Thus there was no proof that HSBC had any right to foreclose. Nevertheless, it convinced an unknowledgeable trial judge to give it summary judgment. We appealed the case to the Maine Supreme Court and fully briefed it. While I was working as a volunteer lawyer on that case, the value of the work that I put into that appeal would have been well in excess of $20,000. On the day that its opposing brief was due, HSBC filed consent to the granting of the appeal, finally conceding at that late stage that it could not prove its entitlement to a foreclosure. It did not much care that it had forced that kind of legal effort on behalf of the homeowner because it does not have to pay the homeowner's fees when it mismanages its cases.

Just a few weeks ago, we saw a similar development from the same servicer law firm, this time representing a Deutsche Bank securitized trust on a loan serviced by JPMorgan Chase. The trial court granted summary judgment to Deutsche Bank, even though it was clear that JPMorgan had failed to send the homeowner a proper notice of default and right to cure. Again, we appealed the case to the Maine Supreme Court, and again the foreclosure plaintiff capitulated only after its lawyers realized that we were not giving up and that it was about to lose.

In the now notorious FNMA v. Bradbury case, in which I exposed the dishonest affidavit practices of GMAC Mortgage's Jeffrey Stephan when I deposed him this past June, GMAC recently moved to dismiss the case after two failed motions for summary judgment, a failed motion to prevent any sharing of Stephan's deposition with other lawyers, and an imposition of sanctions upon it for its bad faith conduct. In moving to dismiss, GMAC admitted that it could not prevail in the action. This admission came after we invested legal work that, if a private lawyer had been billing, would have cost well in excess of $40,000.

In the "hide the ball variation 2" case described in my previous post, where GMAC filed a dishonest mortgagee certification signed by Jeffrey Stephan, it moved to dismiss that case only after we named that client as a plaintiff in the class action that we have brought against it.

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The pattern that emerges from these and similar cases shows the practice of foreclosure industry lawyers to litigate right to the point where they are about to lose and to then cut and run. In this process, they are usually getting themselves off the flat fee charged in unopposed cases and onto an hourly fee arrangement that they like, and they are content to see homeowner's lawyers' time diverted from representing other homeowners.

Wear Down the Opposition

Working with homeowners to obtain modifications can be some of the most rewarding, and yet most frustrating, work that we do as foreclosure defense lawyers. Until Maine's new foreclosure mediation program began on January 1, 2010, we were almost never able to obtain loan modifications for our clients. We couldn't even get employees of servicers to talk to us. With the program now fully operational, we are able to negotiate loan modifications in many cases. It is very satisfying to see a homeowner walk away with a loan payment that he or she can afford, experiencing the relief from a terminated foreclosure action.

The flip side of this picture is the outrageous abuses of the loan modification process that we constantly see. The servicer leagues ahead of all others in this misconduct is Bank of America. We often have Bank of America customers come to us before foreclosures begin. These homeowners are desperate. They have suffered diminished or lost incomes for one reason or another and have been attempting to work out loan modifications before their reserves are totally gone and they are forced to default. Bank of America often ignores these homeowners or puts them through endless cycles of financial disclosures (repeated time after time because it routinely loses these papers), or it simply tells homeowners that they must default before it will even talk to them.

It gets worse. Even in the rare cases where a homeowner has obtained  entry into the HAMP modification process from Bank of America, which is supposed to involve a three-month trial payment period, it strings them along in the temporary payment for nine or 12 months or longer, only to finally, and without any justification, deny a permanent modification. By the time these homeowners get to us, they are angry, discouraged, depressed and exhausted. They are often ready to just give up and to walk away from their homes to bring an end to the tortuous process. I suspect that this is exactly the result that Bank of America wants.

Even when we come into these cases as lawyers, the same exhausting process continues. Agreements that we reach in mediation are not kept. Our efforts to obtain conversions of temporary payment plans to permanent modifications become an effort of guerilla legal warfare. Over the past few months, there have been abundant reports of the perverse incentives that motivate loan servicers to pursue foreclosures and avoid loan modifications. In the line of foreclosure defense on a daily basis, we see directly the suffering inflicted on homeowners who hope for nothing more than a fair chance to stay in their homes.

Where is the outrage?

Certainly the military families who have been abused by JPMorgan Chase must be outraged. Homeowners all over the country experiencing these abusive tactics are outraged. Overworked and tireless foreclosure defense lawyers are outraged by the abuses that we see on a daily basis. Very few judges, like Judge Arthur Shack in New York, have become outraged. But I do not see the outrage at out largest (and taxpayer bailed-out) financial institutions coming to a boiling point. When I testified in front of the House Judiciary Committee in December, I did not come away with any sense of outrage there. When I saw the report about the abuse of American military families, I thought that would become a tipping point, but I has not even made headlines in the nation's print and television media. What is it going to take?

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Banks Aren't Lending Because of the "F" Word: Foreclosure

Jan 24, 2011Mike Konczal

Since banks have cash in their pockets, why aren't the lending gears grinding?

Since banks have cash in their pockets, why aren't the lending gears grinding?

There was lot of interesting back-and-forth on balance sheet recessions at the end of last week. Here are Ryan Avent and Mark Thoma each explaining the argument. David Beckworth pushes back on the concept here (as well as here):

[T]he explanation incorrectly assumes the entire U.S. economy is on a deleveraging cycle....[The balance sheet recession view] fails to recognize that for every debtor there must be a creditor. Thus, for every debtor who is cutting back on spending in order to pay off his debts, there is a creditor receiving money payments. In principle, these creditors should be increasing their money spending to offset the decline in money spending by the debtors -- but if that were happening, there would have been no decline in overall total current-dollar spending. Instead, creditors are sitting on their money because they see an uncertain economic future...

If these creditor households, firms, and banks all simultaneously started spending their excess money balances, this would increase total current-dollar spending and in turn spur a real economic recovery. Moreover, knowing that the real economy would improve would feed back and reinforce current spending decisions by the creditors -- creditor households would buy new cars and remodel their kitchens, creditor firms would build new plants, and creditor banks would increase lending. A virtuous cycle would take hold and push the economy back toward full employment. But this virtuous cycle is not taking off because creditors are still hanging on to their money balances. What is needed to kickstart this cycle is an entity powerful enough to incentivize all the creditor households and firms to start spending their money simultaneously.

Enter the Federal Reserve. It alone has the ability to provide these incentives through its control of monetary policy. The fact that total current-dollar spending has remained depressed for so long means that the Federal Reserve has failed to do its job and effectively has kept monetary policy too tight.

Andy Harless writes a comment I agree with:

"why aren't the creditors who are receiving the increased payments spending the money?"

There's no reason to expect them to spend it, because it's not income; it's just a return of capital. The question would be, "Why aren't they re-lending it?" The reason they aren't re-lending it is that, with debtors trying to pay down their loans, the demand for loans is too low to produce high enough interest rates to justify the risk. You can call it an excess money demand problem, but the excess money demand is a result of the balance sheet problem, because money happens to be an asset that becomes attractive when loan demand is weak.

There are two questions to be answered. The first is whether or not we are on a deleveraging cycle and what the consequences of this would be. The second is whether or not fiscal and/or monetary policy can impact deleveraging.

The economy is deleveraging; that's not made up. The Federal Reserve's latest quarterly Fed Flow of Funds came out last week, and consumers continue to delever:

You can also see this at the FRBNY Consumer Credit Panel.

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What are the consequences of this? I want to recommend this excellent presentation (pdf) by Karen Dynan of Brookings, who walks through likely consumer spending scenarios related to consumer deleveraging. She finds that there is more to come. It certainly looks like consumers are develeraging too fast for it to come just from households paying down debt. Indeed, Dynan finds that a large majority of the deleveraging is coming from writing off bad debt.

When there's a charge-off event, two things happen that are relevant to whether or not the money is relent. The first is that the borrower signals he or she is a credit risk, which will reduce access to credit. The second is that the lender's probability of financial distress goes up, so they want to be more restrictive in how they lend; they have suddenly gotten themselves in the real estate business through replacing a debt asset with an abandoned home in a flooded market. This is the opposite problem of someone saving too much and becoming a better credit risk while a bank has too much to lend.

I think the spillover effects from foreclosures, abandoned properties, limbo REO houses, etc. are real and have consequences for consumer spending, borrowing and investments in neighborhoods. That at least some, if not many, of these foreclosures are the result of a broken, too-thin servicer model is one reason I spend so much time arguing for moving foreclosure negotiations from servicers to bankruptcy judges. We can fix a lot of this with a Chapter M for Mortgage expedited bankruptcy process (and some inflation).

Sometimes people float the argument that mass foreclosure waves should boost consumer spending power, since those homeowners are getting free rent. I think that overestimates how many people stay in their house once foreclosure starts. There's evidence that many people who are delinquent on a first mortgage are still paying junior lien claims. And if you are losing your home, you often have had an unemployment spell; it's not clear that you've boosted your income.

There's other criticisms of this approach. JW Mason reminds us that claims that fiscal consolidation will reduce aggregate income are empirical, ones that are likely true but that we shouldn't take for granted.

 

Mike Konczal is a Fellow at the Roosevelt Institute. **Don't miss Mike speaking with CNN about the nature of our unemployment crisis here.

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How Banks and Servicers Play Hide the Ball

Jan 21, 2011Thomas A. Cox

home-foreclosure-documentForeclosure industry lawyers use every trick in the bag to block the revelation of important documents.**This is the second part of a three-part series.

home-foreclosure-documentForeclosure industry lawyers use every trick in the bag to block the revelation of important documents.**This is the second part of a three-part series. Read part 1 here.

Logic suggests that in foreclosure, the homeowner should be able to know who owns his loan. In the rare circumstance where the homeowner wants to pay off the loan rather than lose his or her house, he needs to know who is entitled to receive that payment so that the wrong party is not paid and so that he is protected against any other party ever claiming a right to payment. Where a homeowner cannot actually pay off his loan, he still has a real interest in knowing who claims ownership of it because only that party can respond to requests to work out a rational loan modification.

Logic does not control the foreclosure industry's practices.

Variation Number 1: MERS hides the ball

In the first variation of this tactic, homeowners must face a massive concealment scheme set up in 1995 by the foreclosure industry in the form of Mortgage Electronic Registration Systems, Inc. ("MERS"). Before MERS came along, every mortgage was recorded in a registry of deeds for the county where a mortgaged home is located. When that mortgage was assigned, it was recorded in the registry. Thus, if a homeowner ever had any doubt as to who owned his mortgage, he had only to check his nearby registry to find that information. MERS unilaterally changed the rules of the game (with no permission sought from state legislatures). Under the new regime, while an original mortgage is still filed in the local registry of deeds, subsequent assignments of that mortgage are not recorded there. Instead, information about them is simply entered into the MERS electronic recording system. Any homeowner can check the records of his local registry of deeds, but no homeowner is permitted to access MERS. Thus, it took away a sure way to identify the owners of mortgage loans.

After an outcry against MERS over its concealment of the identity of mortgage owners in its inaccessible system, it claims to have met those complaints by setting up a web site where homeowners can look up this information. The problem is, the website will not reveal the name of the owner of any mortgage unless the owner voluntarily allows MERS to disclose that information. My experience with look-ups on the website is that it repeatedly reports that the owner of the mortgage has not voluntarily agreed to disclose its identity.

Even when a mortgage owner does  allow its identity to be disclosed, there is a high likelihood that the information will be inaccurate. I am working on a case right now involving a Deutsche Bank trust created in 2006. Deutsche Bank claims that it has owned my client's loan since 2006, but until July of 2009 the loan originator, not Deutsche Bank, was shown on the MERS system as the owner.

Use of the MERS website to look up mortgage ownership information is basically a waste of time for homeowners and their lawyers. I am working on another case right now where there were major errors at the inception of the loan that give our client the right to rescind it under the Truth in Lending Act. We know that the lender is out of business and that some other entity owns the loan, but we do not know who that is. The MERS website does not disclose the identity of the owner of this loan. Under TILA, the rescission letter must be sent to the owner, so we have to file a request with the servicer for that information. Experience tells us that the servicer may or may not respond and that if it does, the response may or may not be accurate. In any event, a lot of lawyer time will be wasted in seeking out information as to the identity of the owner of the loan, information that should be (and in pre-MERS days was) immediately available.

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Variation Number 2: Fannie and Freddie hide the ball

Fannie Mae and Freddie Mac are also major players in the concealment game. In their agreements with the major loan servicers, they require that the servicers foreclose in their own names. In judicial foreclosure states, such as Maine, where I work, we see this repeatedly even though Maine law permits only the real owners of to be the foreclosing parties. To further this subterfuge, Fannie and Freddie will actually endorse and deliver mortgage notes to the servicers to hold temporarily while the servicers foreclose under the guise of being the true owners. The same problem arises here as with the MERS concealment game -- if we, as lawyers representing homeowners, do not know who the true owner is, we do not have the ability to properly represent our clients as we try to resolve that loan.

I have been unable to determine any legal benefit of this subterfuge to Fannie and Freddie. Rather, I suspect that this game relates to political issues. Fannie and Freddie do not want to let the country, our political leadership, and the regulatory agencies see just how tremendous their roles are in the current waive of foreclosures. I suspect that they fear the public and political backlash that might develop if the true scope of their roles in the foreclosure process were revealed.

The problems created by the concealment game are real. I ran into this problem a couple of months ago in a foreclosure action brought by GMAC Mortgage, LLC. Maine law requires the foreclosing plaintiff to file a certification showing that it owns the loan and including proof of that ownership in the form of note endorsements and mortgage assignments. In this case, there was a "Certification of Mortgagee" signed by none other that GMAC's notorious "limited signing officer" Jeffrey Stephan. He certified directly that GMAC Mortgage owned the loan in issue. I attended a mediation session with my client on this case, devoting about five hours of legal time to the effort, while my client took a day off from his hourly pay job to attend. It turned out that Fannie Mae owns this loan. Thus, my client and I went into the mediation without knowing that only Fannie Mae HAMP loan modification programs would be up for negotiation. Because of GMAC's participation in the concealment game, my time and that of my client were wasted, as was the time of the court appointed mediator.

The practical effect of all of this obfuscation is that the foreclosure defense process becomes unduly expensive for homeowners paying for representation, and the very limited resources of legal services and volunteer lawyers are wasted on searches for basic loan ownership information that should never have been hidden in the first place. By playing this game on such a massive scale, the foreclosure industry depletes the resources that the opposition might use in productive tasks, such as pursing loan modifications.

Variation Number 3: obstructing homeowners' discovery efforts

As foreclosure defense lawyers, we know hide the ball variations 1 and 2 well, so we try to compensate by pursing appropriate pre-trial discovery to dig out the true identity of the owners of the loans. Without fail, every single request for the production of documents that we file is met by massive and frivolous objections by counsel representing foreclosure plaintiffs. Even a simple demand for producing the original note and all endorsements is met by an objection that the request is "overly broad" and "unduly burdensome," even though the original note must be produced at trial if the plaintiff is to prevail.

When we ask for information as to the existence of endorsements to the note, we are met with an objection stating that the information is "irrelevant." The servicers and their lawyers know that judges hate pre-trial discovery disputes and are not likely to impose sanctions for their abusive conduct. Servicers seem willing to take the few sanctions orders that we do obtain knowing that, it the vast majority of cases, their obstructive tactics will go unpunished.

When we demand that the servicers produce the pooling and servicing agreements that evidence their claimed right to act on behalf of the loan owners, they refuse to do so, claiming that the agreements are confidential trade secrets. They make this claim even though copies of these agreements appear on the SEC Edgar website as public records. When confronted with this reality, they fall back on their claims that the documents are irrelevant or that it is unduly burdensome to produce them.

This kind of conduct should be sufficient for a court to simply dismiss the foreclosure outright, but our rules and case law do not allow for such dismissals until the violations become even more egregious. Foreclosure industry lawyers know and take advantage of that fact.

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Homeowners Get Screwed, Lawyers Get Played, Banks Make Profit: Where's the Outrage?

Jan 20, 2011Thomas A. Cox

house-in-hands-150The foreclosure industry is playing the system while homeowners suffer. **Stay tuned for the rest of this three-part series.

house-in-hands-150The foreclosure industry is playing the system while homeowners suffer. **Stay tuned for the rest of this three-part series.

Two recent reports, read together, should spark outrage in the country at large and among our political leadership. But no one seems to care anymore. JPMorgan Chase, the country's third largest mortgage lender, confessed that it has overcharged over 4,000 active duty troops on their mortgages and improperly foreclosed upon 14 military families. Only three days before that, reports came out that JPMorgan had just experienced a 47% jump in profits for the previous quarter and 2010 profits reached a record level of $17.4 billion.

The story of the violations of the Servicemembers Civil Relief Act was forced into the open by a Marine fighter pilot. He kept all of his payments current, but due solely to the fault of JPMorgan Chase, his mortgage was placed into default status. His wife reports collection calls (sometimes three a day) coming on Saturdays, Sundays, holidays and even at 3:00 in the morning. It took over two years and the hiring of a lawyer to get JPMorgan to back off and finally admit that he had fully paid his mortgage obligations on time. Certainly no member of the military should have to endure this kind of treatment. But, beyond this, no American homeowner should have to endure those kinds of collection tactics from America's second largest bank. Where is the outrage over these kinds of heavy-handed and abusive tactics?

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The Foreclosure Game

The situation described above fits within a pattern of abuse of American homeowners by JPMorgan Chase and the other major loan servicers that I have experienced in my work as a lawyer representing homeowners in foreclosure. They treat the foreclosure process like a game, seeking to win at any cost without regard to the harm inflicted upon homeowners. Strategic decisions are made, odds of specific outcomes are calculated and bets based upon those odds are placed. Ways to skirt the rules are studied and ignored when referees (judges) are not watching, weak opponents are trampled, cheap shots are taken at opposing parties, and major efforts are made to wear out the opposition as the game winds on. Since the foreclosure industry's pockets are deep, it is more than willing to outspend the opposition to gain an upper hand when it will help win the game.

Lawyers who have the experience and knowledge required to represent homeowners in foreclosure cases are in very short supply. The work does not pay well, if at all, it is very time consuming, and the level of knowledge necessary to do the work well is very high. I have been focusing on this work on a full-time basis for almost three years now. To be competent, I have to be familiar with the Truth in Lending Act ("TILA") and its related Regulation Z, the Homeowner Equity Protection Act ("HOEPA"), the Real Estate Settlement Procedures Act ("RESPA"), the Maine Consumer Credit Code, the Maine Unfair Trade Practices Act, the United States Bankruptcy Code, the Maine Civil Action Foreclosure Statute, the Maine and Federal Rules of Civil Procedure, the constantly changing HAMP loan modification guidelines, and the separate and distinct guidelines of Fannie, Freddie, FHA, VA, and Rural Development, each of which has its own variations on HAMP. In addition, I have to keep current on developing foreclosure case law all over the country on a daily basis. The number of us willing and able do this work is extremely limited when measured against the needs of homeowners for legal assistance -- I hear that fewer than 5% of homeowners looking for legal help are able to obtain it.

Perhaps the largest frustration for me in this work is to experience on a daily basis the games that the servicers play in the foreclosure process. I am constantly frustrated by how much of my time is spent in dealing with the servicers' antics, thus reducing the number of homeowners that I and my colleagues are able to help. What will follow is a two-part explanation of the game playing that we experience in our dealings with the mortgage loan servicers and their lawyers.

Thomas Cox is a retired bank lawyer in Portland, Maine who serves as the Volunteer Program Coordinator for the Maine Attorney’s Saving Homes (MASH) program. He represents homeowners in foreclosure and assists and consults with other volunteer lawyers in providing pro bono legal services to these Maine homeowners.

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Obama's Economic Team: Focused on the Wrong Symptoms

Jan 19, 2011Mike Konczal

A reliance on supply-side theory, in both the White House and the media, keeps us from addressing our real economic problems.

Peter Baker has a 6,500-word piece in the upcoming Sunday New York Times MagazineThe White House Looks For Work, about Obama's economic team and the quest to create jobs. He says:

A reliance on supply-side theory, in both the White House and the media, keeps us from addressing our real economic problems.

Peter Baker has a 6,500-word piece in the upcoming Sunday New York Times MagazineThe White House Looks For Work, about Obama's economic team and the quest to create jobs. He says:

I went to see Geithner one evening in late December in his high-ceilinged office at the end of the third floor in the Treasury Building...All the second-guessing, he said, missed the point. “Everybody now has these cool ideas -- why didn’t we do it in this way, why didn’t we do it bigger, why didn’t we have a different mix,” he said, thinking about the stimulus. “All of that is marginal.” What was important, he said, were speed and force. As for nationalizing or liquidating the banks, he said, “They both would have been catastrophic.”

Marcy Wheeler points out that the words "foreclosure", "housing" or "HAMP" don't come up in the piece at all. How telling is that? We just had a housing bubble collapse, and the signature post-collapse stories are about the fraudulent ways the securities were made in the first place, the obvious flaws in the servicing models, and the record numbers of foreclosures during the entirety of Obama's first term in office.

There are obvious problems of spillovers: cascading housing price depreciation, lack of mobility, abandoned properties and the effects on neighborhoods, etc. There's also the greater issue that households are in a balance sheet recession, where they are saddled with worthless housing debt that will keep the housing market depressed. As foreclosure spins out of control, housing values plummet further, putting households further underwater, decreasing consumer spending, etc.

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Atif Mian and Amir Sufi have recently written an economic letter for the Federal Reserve Bank of San Francisco, Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery:. They find:

Overall, the county evidence strongly suggests that credit demand is weak because of an overleveraged household sector. This view is supported by survey evidence that the main worry of businesses is sales, not financing. The October 2010 National Federation of Independent Business survey (Dunkelberg and Wade 2010) shows that almost no small businesses viewed credit availability as their primary problem. In fact, the NFIB has reported that weak sales were the top problem facing small businesses throughout the recession. Weak consumer demand also helps explain the enormous cash balances currently held by U.S. corporations (see Lahart 2010). These results have important policy implications. If the main problems facing businesses relate to depressed consumer demand due to a household sector weighed down by debt, investment tax subsidies and lower interest rates may have a limited effect on business investment and employment growth.

The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery.

I'm going to write more about this later, but it's amazing how our opinion leaders are locked into the "supply-side" logic, even when dealing with our current recession. The article spends a lot of time on the Chamber of Commerce, Obama dealing with business leaders, and how to get business confidence back. It doesn't mention that the number one self-reported problem facing small businesses, by a mile, is poor sales. The article is really stuck on the idea that the problem must be the deficit, or the "populist" tone Obama has taken with Wall Street, or the financial reform bill, not depressed consumer spending.

Embedded in that assumption is the notion that the only thing that would hold back a full employment economy is government action. Deregulate enough, and supply will create its own demand. It's too bad that doesn't describe our situation.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Mike Konczal on Countdown: Beware Foreclosure Solutions that Bailout the Banks

Jan 18, 2011

Want some good news? Don't look to the housing market. Roosevelt Institute Fellow Mike Konczal went on Countdown to explain to guest host Chris Hayes the dangers our economy still faces from the foreclosure crisis:

Visit msnbc.com for breaking news, world news, and news about the economy

Want some good news? Don't look to the housing market. Roosevelt Institute Fellow Mike Konczal went on Countdown to explain to guest host Chris Hayes the dangers our economy still faces from the foreclosure crisis:

Visit msnbc.com for breaking news, world news, and news about the economy

Homes are being repossessed so quickly that there's no one to buy them, and Mike points out that they're being put into a "phantom zone" on banks' balance sheets. This is likely going to decimate housing prices further, putting homeowners more underwater. It's also going to ravage state and municipality budget sheets, which means "they're going to lay off teachers to help cover for these losses," Mike says. That's like fighting a fire with lighter fluid.

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People have long been hoping this problem will just disappear, so it's good to see someone doing something about it, Mike says -- Third Way has written an open letter to Congress urging action. But it's not the solution we need. "It leaves Wall Street still in the diver's seat," he says. "The way that [banks] deal with debt, called the servicing industry, is completely unregulated, has huge conflicts of interest where Wall Street profits when people go into foreclosure, and both investors and borrowers lose." He adds, "It's very important to think of this as a bank bailout."

But not all is hopeless. We do have a solution just waiting to be used -- our bankruptcy courts, which can modify loans and tackle the problem. "Bankruptcy courts are one of our best institutions in the country and an institution uniquely situated to handle foreclosures," Mike says.

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Debt, Housing and Currency: Cautiously Optimistic for 2011

Jan 14, 2011Edward Harrison

the-economy-200Some signs are looking up, but there are still plenty of landmines in the economy.

the-economy-200Some signs are looking up, but there are still plenty of landmines in the economy.

It's high time I laid my cards on the table about 2011. So, here it is: I am cautiously optimistic about the US and global economy for 2011. Let me explain both pieces of the puzzle -- the cautious part and the optimistic part -- below. I'll start with the positive first.

Optimistic

Double dip recessions are not the norm; they are the exception. Why? Here's how I put it in September:

Recoveries by definition start from a point of diminished output because recessions are periods of diminishing output. So output in the initial period of any recovery is always lower. That's how the math works -- and also why I continue to stress that this is a technical recovery.

But, the important part to remember is how the business cycle works and how the recency effect creates self-reinforcing declines or recoveries in output.

Increases in income lead to increases in retail sales which lead to increases in output and inventories which lead to more jobs and thus a further increase in income. This is a virtuous circle that defines the upward path of a business cycle.

So, you really need to see powerful secular forces to overcome this self-reinforcing dynamic. Once a technical recovery begins, we should expect it to continue and blossom into a full-blown cyclical recovery. Obviously, I am talking about the medium-term, not the long-term here. But the point is that we have been in recovery for over one-and-a-half years in the US. Odds are that this will continue for some time to come (through 2011 at least).

I see the jobs picture as encouraging. Employment is lagging, as it has in the last two recoveries. So the recovery looks particularly weak. Moreover, there seems to be a skew toward the upper income strata. This makes the technical recovery appear even more sluggish. But clearly, the jobs picture is improving.

What are US jobless claims telling us about recovery? They are averaging about 410,000, down from almost 470,000 a year ago. And since employment is a lagging indicator, we should expect claims to drop even further as GDP has been growing.

Across the board, the economic indicators show a modest but improving economic picture: industrial production, capacity utilization, personal income, retail sales. And I expect this to continue through at least the first half of 2011, probably through the whole year.

Cautious

I am cautious about this outlook because I still believe the US is in a cyclical upturn within a larger depression. The concept that the structural problems of excessive household indebtedness and an over-reliance on financial services and housing can be solved by money printing and fiscal stimulus leaves me cold. My thesis is that these remedies mask problems only due to the cyclical upturn. If the recovery is not used to whittle the problem away, the next recession will be as bad or worse than the last.

That said, policy makers have done a pretty good job of avoiding egregious policy errors so far. I think that gives us enough oomph to get over the hump so the cyclical agents like inventories and cyclical hiring can do their magic. But, here are my lingering concerns.

1. Europe: the sovereign debt crisis refuses to go away. The European periphery is hurting but the crisis has infected the core via Belgium and Italy. I expect the crisis to get worse before decisive action is taken because that's how politicians usually respond. There are three options for the euro zone: monetisation, default, or break-up. The question is whether this -- in and of itself -- deals a fatal blow to recovery in Europe, infecting the global economy. If you had asked me this question early last year, I would have said yes. Today, one year more into a cyclical recovery, it is less clear.

2. US states and municipalities: Meredith Whitney has put this crisis front and center. My take is similar to the one on Europe: The question is whether this -- in and of itself -- deals a fatal blow to recovery in the US, infecting the global economy. Here, I have always felt that the budget issues would only become dire in a cyclical downturn as declining asset prices created public sector pension losses. In an upturn, tax revenue increases, as do accounting gains from asset prices. Costs for supporting the unemployed decrease. To the degree that there are budget problems, the situation is very pro-cyclical -- meaning you have what MBAs call a high degree of operating leverage on municipal and state income statements. Leverage works to magnify cyclical ups and downs. That means that, while I agree with Whitney's alarm on munis, I do not think this is a 2011 event.

3. Housing: House price declines have resumed in the UK and the US. They never stopped in Ireland and Spain. The housing double dip is in progress. Complicating matters, clearly, fraud was a big issue not only in the origination of mortgage loans in the US but also in packaging and foreclosure. There is a real possibility that a systemic legal problem develops on that front in 2011. I don't know how this problem will be resolved. At this point, I see it as the biggest near-term risk for the US in 2011.

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4. Currency Wars: a lot of good is done simply by having economic growth. It takes a lot of political heat off politicians. The currency wars are really a political event because they are caused by a lack of aggregate demand. When the pie shrinks, individual countries feel obliged to implement beggar-thy-neighbour policies to maintain their standards of living by taking a larger share of the pie. The developed economies have felt this ‘pie shrinkage' most acutely. So it is they who are driving the so-called currency wars forward. The emerging markets are merely reacting in kind. I say "First the rate reductions, then money printing, then the currency war, then the tariffs, then..." hopefully economic recovery. But, as with the other problems, unless recovery is used to solve the issue of external imbalances created by our jury-rigged monetary system, the so-called Bretton Woods II, then tensions will return worse than before when a recession hits. Only after a full-blown crisis will the underlying issues be addressed. So, wait for the next crisis for reform of the monetary system.

5. UPDATE: Added this paragraph -- Commodity price Inflation: There is a real threat to recovery from commodity price inflation. We have already begun to see signs of food price riots, food price controls and the like in emerging markets. Additionally, Brent crude is at 27-month highs, closing in on $100 a barrel. Just think back to 2008; this type of commodity price inflation was toxic and sowed the seeds of its own demand destruction.

Conclusions

I may write what I think this means for stocks or bonds in another post. But the quick data dump is that profit margins are cyclically high while P/E ratios are above their long-term levels. If firms staff up, we could see a modest rise in stocks due to an increase in aggregate demand, despite these two factors. Personally, I tend to like large cap value and I think that's the right call for this environment because, while I am optimistic, I am cautious. On bonds, I have been saying for four months that they showed a poor risk/reward skew at these levels. Moreover, duration changes are pretty large when yields are low. That means you can sustain heavy losses if yields tick up. There is no reason to be a hero by moving out the curve and getting long duration. Nor is there any reason to load up on risk, especially in munis and sovereign debt. That is still my view. But US sovereign debt is a lot more attractive today than it was four months ago.

On the economic front, I moved away from a multi-year recovery baseline because of the prospect of policy errors. We avoided those errors in 2010. With the technical recovery poised to become a full-blown cyclical recovery, I think it's time to move back to the multi-year recovery baseline. Let me repeat my oft quoted phrase about the secular leveraging in the developed economies:

The problem I have with the recent history of growth in the United States, the United Kingdom, Spain and Ireland in particular is that the growth was underpinned by high debt accumulation and low savings. As debt is a mechanism through which we pull demand forward, the debt and consumption has meant we have been growing today at the expense of future growth.

Low quality growth can go on for a long time

This dynamic can continue for a very, very long time. In the United States, by virtue of America's possession of the world's reserve currency, an increase in aggregate debt levels has been successfully financed for well over twenty-five years. Mind you, there have been a number of landmines along the way. But, time and again, these pitfalls have been avoided through asymmetric monetary policy and counter-cyclical fiscal expansion.

So, poor quality growth can continue for very long indeed. And it is this fact which allows the narrative of easy money and over-consumption to gain sway.

The boy who cried wolf

A soothsayer who counsels against this type of economic policy, but who warns of impending collapse, will surely be seen as the boy who cries wolf. Think back to 2001 or 2002. Did we not witness then the same spectacle whereby the bears and doomsayers were let out of their holes to warn of impending doom from reckless economic policy? By 2004, unless these individuals changed their tune, they were long forgotten or even laughed at -- only to resurface in 2007 and 2008 with their new tales of woe. Knowing this shapes the psychology of economic forecasting is why missing the turn is disastrous for one's career. Efforts to avoid missing the turn are also part of a very large pro-cyclical psychological force underpinning a cyclical bull market.

The fact is: low quality growth does not lead to immediate economic calamity. It can continue through many business cycles. Even today, it is wholly conceivable that we could experience a multi-year economic expansion on the back of renewed monetary and fiscal expansion.

Marc Faber: "Don't underestimate the power of printing money"

You will recall that I wrote a post at the depths of the market implosion highlighting a phrase by Marc Faber, "Don't underestimate the power of printing money." This quote has stuck with me as asset markets have soared in the intervening time. What Faber was alluding to was the fact that printing money works. It does goose the economy as intended and it can induce a cyclical recovery.

Nevertheless, the recovery is likely to be of poor quality due to significant malinvestment. Debt levels will rise and capital investment will be directed toward riskier enterprises. Look at what's happening in China. Are you telling me stimulus is not working? It most certainly is.

In the west, stimulus is also working. It is designed to stop people from hoarding cash and to consume. It is also designed to get people out of savings accounts and into riskier asset classes. It is doing just that.

But, remember, the developed world has a lot of problems to work through. The origins of the next crisis are already apparent -- and they have nothing to do with cyclical upturns and everything to do with a secular trend of rising indebtedness, now in both the public and private sectors in developed economies. If the developed economies use this cyclical upturn wisely to reduce household debt levels, to increase private sector savings, to clean up the balance sheets of weak banks, and to cautiously normalize fiscal and monetary policy, we will be in a much better position to counteract economic weakness when the next downturn hits.

Edward Harrison blogs at Creditwritedowns.com, where this  piece originally appeared.

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Detroit: An American Ghetto Where a House Costs Less Than a Car

Jan 12, 2011Bryce Covert

What used to be a symbol of middle class prosperity now lies in ruins.

Detroit's history tells the story of the rise of manufacturing and economic prowess in the US. It is the story of the American middle class, built on the back of a booming industrial sector. But today it's become an omen of the struggles for middle- and lower-class Americans and the manufacturing jobs they once relied on. And the city itself is turning into a ghetto.

What used to be a symbol of middle class prosperity now lies in ruins.

Detroit's history tells the story of the rise of manufacturing and economic prowess in the US. It is the story of the American middle class, built on the back of a booming industrial sector. But today it's become an omen of the struggles for middle- and lower-class Americans and the manufacturing jobs they once relied on. And the city itself is turning into a ghetto.

Convenient to transportation on rivers and rail, Detroit became a hub of industry as far back as the late 1800s, leading to a nouveau riche class of wealthy industrialists. But its real claim to fame would come when Henry Ford piggybacked on the city's established carriage trade and built his first car manufacturing plant in 1899. Ford was the epitome of an American self-made man -- the son of an immigrant farmer who left to apprentice with a machinist and go on to become an engineer and an industrialist. Soon after Ford's plant opened up, GM, Chrysler and American Motors would follow suit, and the city quickly became the world's car capital. The booming automobile industry sucked in labor, and the city's ranks swelled from 265,000 in 1900 to over 1.5 million in 1930. With the workers -- who came from the South as well as Europe -- came labor disputes and the rise of union activism. It became the fourth largest city in the country. This period was the city's gilded age, during which skyscrapers, mansions, and historic buildings all cropped up, as well as apartment buildings aimed at middle class workers from the factories. This was the American Dream.

Now look at the city today: it is literally falling apart. It has shed roughly 1 million residents since the 1950s, and as the 2010 census showed Michigan was the only state to lose population, some analysts estimated that it would also show a drop to 150,000 people living in Detroit, down from 951,000 in 2000. The median price of a home sold in Detroit in 2008 was $7,500 -- less than the price of a car -- and the proportion of vacant homes to occupied ones almost tripled since 1999 to 28%. The city's unemployment rate just fell, but from a dismal 13.3% to a still-pretty-dismal 12%. Median household income dropped nearly 25% to $28,730 between 1999-2008. The auto crisis allowed the big car companies to force two-tier payment systems in GM and Chrysler plants and labor's influence is taking a huge blow in the recession. And those beautiful buildings built with booming auto profits lie in shambles, which look straight off the set of a post-apocalyptic movie. (I highly recommend clicking through and taking in these devastating, striking photos.)

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Living in this city is tantamount to living in a lawless state. Just ask Johnette Barham, who stuck it out through more than 10 burglaries and break-ins before her place and most of what she owned were torched. "I was constantly being targeted in a way I couldn't predict, in a way that couldn't be controlled by the police," she told the WSJ. The empty houses that surround her can no longer act as a buffer against crime, and she and many other middle-class people are fleeing the city in droves. Wealthy neighborhoods have resorted to hiring private security firms to police their streets. Why? The Detroit Police Department is down about 700 officers, according to Warren Evans, who was appointed police chief in July 2009. There's no one he can send to take care of crimes like petty theft when they're working round the clock to bring down homicide rates.

It's not just the police force that's feeling the pain from budget cuts. As fires raged through the city in September, which destroyed 85 homes and structures, the level of damage was directly connected to cutbacks. They've led to 8-12 fire company "brown outs" each day, meaning the companies are temporarily unavailable to fight fires, and one of the decommissioned stations was reported to be closest to a neighborhood that went up in flames. The city's public school system is considering a GM-style restructuring to deal with its $327 million deficit and avoid bankruptcy. As Mayor Dave Bing grapples with the city's $300 million budget gap, he's looking to cut services in the emptier parts of town in an effort to shrink the city, which means many areas will be left without basic services such as water and sewage. On top of the cuts at the city and state level, cuts at the federal level also imperil Detroit's economy -- take Defense Secretary Robert Gates' recent announcement to cut the defense budget, which will mean layoffs in Michigan defense companies. Not to mention that just Friday Ben Bernanke said the Federal Reserve won't be helping out any state or local governments saddled with debt. All of these trends are likely to continue or worsen as the recession drags on and cutting budgets and services is in vogue.

And while Detroit's troubles are gruesome, it's not the only city in America that's falling to shambles. Take Baltimore. Roosevelt Institute Senior Fellow Tom Ferguson recently took to the city's streets to explain how it's caught in a housing Catch-22. When cheap loans pushed on the population went sour, they brought down many communities' housing prices, and now without a steady tax base no one is interested in making loans to a city that is desperate for funds. It's no wonder Ferguson tells this story outside boarded up houses.

And it's no wonder that images of Detroit ended up on a blog called Ghetto America. Once our pride and joy, Detroit now reminds us of how far off track our economy has gone and how downtrodden the middle class is. As Roosevelt Institute Senior Fellow Rob Johnson said to me:

Detroit is the canary in the coalmine of America's harsh, unbridled economic adjustment. It can happen anywhere with a violence and swiftness that is only tolerated by suppressing these horrid images and neglecting the human consequences. Such an unnecessary loss of grand creations.

Bryce Covert is Assistant Editor at New Deal 2.0.

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