Part 1: Deliver Housing Support Directly to Those Who Need It

Feb 18, 2011Christopher Papagianis

house-in-hands-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free?

house-in-hands-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free? In the first part, Christopher Papagianis, Managing Director of the New York City office at the think tank e21, argues for full privatization with direct government subsidies to ensure access to credit for all. **Read part two here.

1. What are the GSEs and what went wrong with them?

Fannie and Freddie buy and guarantee mortgages, converting the mortgage payments into guaranteed cash flows for MBS notes and standardizing the notes to enhance investor acceptance and market liquidity. Before they blew up, their investors would capture the guarantee fees on the mortgages and pass through the rest of the mortgage payments to MBS holders. They also used their ability to issue implicitly guaranteed debt to build massive portfolios of the same mortgage-backed securities (MBS) they issued. These portfolios were the source of huge profits during the boom years. The profits came from the gap between the yields on mortgages and the interest rate Fannie and Freddie paid on their own borrowings, which was just slightly greater than Treasury rates thanks to government sponsorship.

The analytical challenge before us is that the most egregious excesses of the previous GSE model are not what precipitated all the taxpayer losses. For example, the first instinct of many reformers would be to ensure that the GSEs (or their successors) are never again able to build big mortgage portfolios. Once a pool of mortgages was converted into GSE-guaranteed MBS notes, there was no need for them to then issue additional debt to repurchase the guaranteed MBS. These big portfolios served "no credible purpose" aside from a profit center for GSE shareholders and management. The second instinct would probably be to strictly limit the mortgages that would qualify for purchase or guarantee.

While both make sense and would have made for sound reform in 2005, focusing on these two issues now more or less ignores the big lessons from the 2006-2010 market meltdown. Of the GSEs' combined $226 billion in losses, over $166 billion (73%) came from the guarantee business. The investment portfolio accounts for just $21 billion (9%) of losses. Had the investment portfolios been eliminated in 2005, the GSEs would have still suffered losses from guaranteed mortgages that would have wiped out their capital base several times over.

For many, the challenge ahead seems to be designing a strategy that maintains a government guarantee for mortgage credit risk while attenuating some of the more egregious elements of the old GSE model. The problem with operating under this framework, however, is that it was the mispricing that arose from the government guarantee itself that really turned out to be the big source of taxpayer losses.

2. Is there a role for the government in the housing market?

Yes. Today, almost all of the new mortgage originations in this country are done with some government involvement. In addition, the government dedicates roughly $300 billion each year to directly subsidize housing, split roughly evenly between tax subsidies and direct government spending. In all, it cuts across several agencies and over 28 different programs to support both homeowners and renters. Given all of the current support that's in place, the real question is how can we comprehensively rationalize the role for government in the housing market.

Unlike the fairly straightforward accounting and (on-budget) treatment of all the different tax provisions related to housing, the subsidies on the spending side are more complex and confusing. On behalf of taxpayers, the federal government issues, guarantees, and insures mortgages. Taxpayers subsidize the redevelopment and sale of vacant properties and foreclosed homes. They subsidize housing vouchers, a public housing program, and at least eight more block grant initiatives for rental housing. The budgetary costs of these programs are measured in three different ways - on a cash flow basis, on a present value basis, and on a present value basis adjusted for market risk. Without an apples-to-apples comparison, it is nearly impossible for policymakers to compare the effectiveness of these programs and to allocate scarce budgetary resources in ways that do the most good.

With regards to Fannie and Freddie, there appears to be a consensus now that the inherent flaw of the "government-sponsored" business was a lack of transparency and accountability in the allocation of the underlying subsidy: profits went to private shareholders and losses were socialized, or ultimately covered by taxpayers. As policymakers review housing subsidies and consider alternatives, they must be careful to make clear the risks and costs of subsidizing housing investment. Government loan guarantees can appear to be low cost since they pay out only if a borrower defaults and official estimates often exclude a premium for market risk. But we have learned that such guarantees are contingent on an accurate assessment of the various risks involved and they can be extremely expensive if those risk assessments are wrong or if the defaults all occur at the same time. Improperly scored loan guarantees also create a moral hazard, as the implementing agencies can assume too much risk by lowering their lending standards over time.

Where possible, it would be more transparent and far more efficient for Congress to deliver housing-related subsidies directly to the homeowner. This is the primary way the government subsidizes food with food stamps or charity through the tax code. Private financial institutions then would no longer have the ability to capture some of that subsidy for their managers and shareholders, as Fannie and Freddie did for so many years. Direct subsidies would also reduce the risk of another economic crisis.

3. What does your plan do to fix the problems?

The government has a terrible track record for pricing guarantees correctly. There are other ways to subsidize housing if that's what Congress and others would like to do. Providing housing-related subsides directly to the individual is probably the only way to avoid the moral hazard that comes with a mortgage guarantee.

Therefore, it appears as though the most promising path for Congress is to commit to a credible strategy that puts the GSEs in receivership and liquidates their operations over a 5 to 7 year period. Taxpayers would cover any shortfalls so no creditor loses anything in a wind-down or is tempted to sell their securities. In the future, Congress would keep Federal Housing Administration (FHA) mortgages available for borrowers under certain income and mortgage loan thresholds and leave the rest of the market to the private sector.

4. Given that there are many plans, what is the strength and weaknesses of your approach?

The strength is little to no moral hazard moving forward. We stop obscuring just how much taxpayers are put at risk by indirectly or implicitly subsidizing housing.

The weakness is that without some other actions by Congress, mortgage costs would presumably go up, as the old guarantees would now be paid for directly by mortgage borrowers.

However, Congress does have some options if it wants to try and offset some of this cost increase. Several scholars have suggested subsidizing interest rates on certain loans or providing a flat housing credit. (See Charles Calomiris and Raj Date for more on how interest rates could be subsidized through swaps. See Josh Rosner for more on how the mortgage interest rate deduction could be reformed to reward building equity over adding more debt and how establishing clear securitization disclosures could help re-start this market.)

5. What will the mortgage market look like if your plan is enacted, for both people who want to lend money and people who want to buy a home?

In the future, prospective homebuyers would still work with banks and brokers to find the best loan for the price. And since nobody is talking about winding down Fannie or Freddie tomorrow, the private market could be folded back into the equation steadily over time. This would give the securitization market time to develop. Obviously, you'd want to make sure reforms were in place as this happened so that the future system would be equipped with the information required to evaluate/measure credit risk over time. Perhaps a covered bonds market could also be started as well. Portfolio lending would also likely increase.

6. Will there be 30-year, fixed loans in the future? What are the consequences of this?

Yes. First, FHA will still offer its 30-year product. Second, I think that 30-year fixed loans will still be available in the private market for borrowers who can extend a meaningful downpayment. The jumbo mortgage market is probably a good analog.

Borrowing in general, however, will probably cost more because there will be no under-priced government guarantee involved to shield investors from losses. This means that some borrowers who qualified for certain loans during the boom would face new and real trade-offs. Put more bluntly, credit would (and should) not be as readily available - compared with the boom years.

Surely, some individuals (or families) will end up renting. Others will save more so they can extend a larger downpayment or purchase a less expensive home.

7. Hasn't TARP taught us that the government will always be some sort of implicit backstop? How can the government ever credibly commit to not jumping in at the last moment?

By this logic, the government should just come out and guarantee most large institutions or even asset classes.

There is a fundamental question that people need to ask when they think about GSE reform and the future of housing finance. Is it in the long-run interests of the economy to provide continued credit support for housing (at least at the current pre-crisis magnitude)? Housing is a form of consumption and its continued subsidization diverts capital from other more productive uses.

This question is also wrapped up in the Too Big To Fail issue. The GSEs proved to be TBTF. Several of the top big banks were also deemed TBTF. In a world without Fannie and Freddie, there is a risk that investors will just assume that the government will step in and protect the banks that are necessary to maintain a liquid mortgage market. I am concerned about this.

Yet, while I do not think Congress solved the TBTF issue with the Dodd-Frank law, I still hold out hope that it will find a solution. I guess I'm not pessimistic enough to concede defeat and just assume that the government will be better off by explicitly taking on all the tail risk in the housing market.

8. If we go with full privatization, we'll see the private securitization market grow as a percentage of total mortgages. But didn't private securitization markets fail in many ways over the past 10 years? Didn't hedge funds and middle-men make a lot of loans that went bad and increased volatility, and won't that happen again?

It is not a foregone conclusion that securitization will be re-born. The alternative to securitization markets - and shadow banking generally - has always been the traditional banking model of funding mortgages through deposits. It may be that the low-cost guarantee written by the GSEs made the traditional banking model uneconomic and that the elimination of this guarantee will make banks more willing to hold loans on balance sheet. We should not be so quick to write off the possibility of greater on-balance sheet lending. The GSEs' portfolios, for example, are a perfect example of its profit potential. The challenge for private lenders had been managing the interest rate risk and attracting funds of sufficiently low-cost to compete with the GSEs.

The future of securitization is likely to be much better than many anticipate. There is little evidence of systematic mis-rating of mortgage-backed security (MBS). The big problems came with CDOs and other re-securitization products. For example, why is it unreasonable for $75 million of a $100 million deal with 400 (high credit quality) mortgages with an average principal balance of $250,000 to receive a AAA rating? For investors in this tranche to suffer losses, half of the mortgages would have to default and suffer loss rates of 50% on average. Subordination of this magnitude is likely to suffice in all but the worst housing environments, as is seen by the surprisingly strong performance of the GSEs' subprime portfolios. Will a CDO market re-start and create new problems? Perhaps, but there does not seem much appetite for mezzanine ABS CDOs at the moment and it seems reasonable to believe the next blow-up will occur elsewhere, given investors' and rating agencies' experience (and new information demands) with regards to these products.

Christopher Papagianis is Managing Director of the New York City office at the think tank e21.

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GSE Reform: What Do We Do with the Housing Market Now?

Feb 18, 2011Mike Konczal

A week ago Treasury released Reforming America's Housing Finance Market, a report to Congress about the future of the GSEs and the housing market. In addition to creating a roadmap for winding down Fannie Mae and Freddie Mac, the plan outlined three approaches to the future of the housing market:

A week ago Treasury released Reforming America's Housing Finance Market, a report to Congress about the future of the GSEs and the housing market. In addition to creating a roadmap for winding down Fannie Mae and Freddie Mac, the plan outlined three approaches to the future of the housing market:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers.

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis.

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.

All of these options have strengths and weaknesses. In order to get a better sense of them, I asked two housing policy wonks to explain their approaches and answer some questions.

To discuss Option 1, we have Chris Papagianis, Managing Director of the New York City office of e21, a think tank that aims "to advance free enterprise, fiscal discipline, economic growth, and the rule of law." Here is his testimony on housing finance before the Committee on financial services, and here are things he has written on housing policy debate and GSE reform.

To discuss Option 3, we have David Min, Associate Director for Financial Markets Policy at Center for American Progress, a think tank "dedicated to improving the lives of Americans through progressive ideas and action." Min has written many articles and research papers for the Center for American Progress, including papers on the advantages of the 30-year fixed rate mortgage and Canada's mortgage market. He is a member of their Mortgage Finance Working Group, which has a plan for the future of the housing market titled "A Responsible Market for Housing Finance."

You can read Chris Papagianis contribution here.

You can read David Min's contribution here.

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Where's the Courage? America Must Stand Up to Corporations and Bought Politicians

Feb 17, 2011Joe Costello

raised-fist-150Who will have the guts to fix our broken political and economic system, as we did in the New Deal era?

raised-fist-150Who will have the guts to fix our broken political and economic system, as we did in the New Deal era?

It's hard to imagine the present American economy getting healthy without the housing market being fixed. Even a Dow at 36,000 would have limited impact with housing prices down another 10-20%, as very few in America have any wealth in the stock market, if they have any savings at all. Much of it is in their homes, and that continues to get eaten away. So Chris Whalen's Reuters piece accompanying his downgrading of Wells Fargo due to the continuing mortgage fiasco -- Yves Smith continues with best coverage on this issue -- is well worth the read.

Whalen makes an excellent point about the courts and mortgage crisis. He writes:

The US banking industry would have been far better off if they had allowed sane bankruptcy reform to be enacted with respect to restructuring of first mortgages. Over-burdened home owners could discharge unsecured debt and modify mortgage loans under the watchful eye of bankruptcy judges, who understand how to balance debtor and creditor rights.

Instead banks seeking foreclosure now face state court judges, who are elected by the people in their communities and not used to the intricacies of Wall Street finance. State courts are taking a much harsher line with banks than would federal bankruptcy judges. Banks seeking to conduct foreclosures are being met by a phalanx of judges that now say "show me the mortgage note and prove you are the one with the right to foreclose or I will not act on your pleadings."

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This is a lesson in American democracy 101 -- the separation of powers. The genius of the American system was not to centralize power in DC, but to separate it -- with three branches of government, but also balancing DC with the states, localities, and finally the ultimate power in the citizen, we the people. The agrarian era architecture of our government set up by America's founders always had a hard time dealing with the new industrial era and its most powerful and insidious creation, the corporation. In the 1930s, in response to the crisis of the national/global economy created by the industrial corporation, the New Deal was born, and liberals en masse headed to DC to rule briefly for a few decades. This lasted until the modern corporation and its entrenched interests could gain control, making present DC both eminently corrupt and dysfunctional, a fact our remaining liberals continue to either ignore or discount.

Matt Taibbi has an excellent piece documenting the most open and not even the most egregious of crimes committed by banking and finance, which the complicit powers of DC ignore. No one goes to jail. It reminds me of the California Energy scam 10 years ago, where again no one went to jail and the Clinton FERC sat on its hands as the people of California were fleeced by multiple energy companies and Wall Street. The fact is the American system is broken, but paradoxically its redemption lies in restoring and evolving the system. At this point, what is missing most is courage.

It is time to think much larger than worrying every day about what happens in DC and to liberals. I can only point to a piece in the LA Times yesterday regarding Egypt:

Not wanting to be left out of the future government, two competing groups of young activists are meeting with the military and distancing themselves from longtime opposition figures they regard as inept and weakened from years of oppression by Egyptian security forces.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Why Elizabeth Warren Is Still the Best Choice for CFPB Director

Feb 3, 2011Mike Konczal

She's handled staffing and criticism while building bridges. What more could you ask for?

She's handled staffing and criticism while building bridges. What more could you ask for?

The Consumer Financial Protection Bureau just launched its website. Meanwhile, Shahien Nasiripour has a story that found "... if the White House can't get a nominee through the Senate by July, the bureau will lack the authority to supervise nonbank lenders, according to a Jan. 10 report by the inspectors general of the Treasury Department and Federal Reserve obtained by The Huffington Post." One of the main reasons for creating a Consumer Financial Protection Bureau is to close a loophole called "regulatory arbitrage," which lets a lot of these nonbank subprime lenders avoid following the same rules that regular banks do when it comes to lending. So if there isn't a nominee soon, the CFPB is going to encounter a serious problem in doing one of the most important parts of its job.

So it's time to talk about who should lead it. People are currently having this conversation, putting forward potential candidates for the job. I've been following this since the bill passed and, at this point, I think Elizabeth Warren is the obvious choice. Warren is obviously credentialed enough -- a Harvard Law professor who came up with the idea, who has written extensively on the topic and is the third most cited scholar on bankruptcy and consumer-related finances. During the previous debate, there were three major critiques about her running the CFPB: that she wasn't experienced enough in starting a new agency, that she was disliked by industry, and that she wasn't confirmable. Since then she's done an excellent job starting up the agency, hitting the ground running. She has stalemated the critiques from industry and Republicans. And the Republicans have shown that they hate the agency itself but don't actually mind Warren as far as candidates go, so she's relatively more confirmable than people imagine.  She's made as good of a transition from campaigning to governing as anyone would have expected, and then some.

Starting Up The Agency

As for staffing, Warren is managing a team of 150 as they continue to build and launch the bureau. As far as all reports go, she's doing an excellent job. She is under some intense scrutiny, particularly from established regulators and lobbyists, and surviving a round of hostile questioning from a resurgent Republican House. There have been no horror stories. By all accounts, Warren and the CFPB team are getting along with Secretary Geithner and Treasury.

She has signed up Holly Petraeus to work on military affairs, giving the bureau a scope that builds on many different fronts. (The GOP has supported consumer protection bills for the military in the past.) And the most important hire, from my point of view, is former Ohio Attorney General Richard Cordray to help lead enforcement, an AG who is serious about getting to the bottom of the foreclosure fraud crisis. Warren has assembled a fantastic team with few, if any, pitfalls.

While assembling the team, Warren has also contributed to the complicated, yet very important, battle over servicing fraud, helping to veto an ill-advised notarization bill early on. She has been able to staff an impressive team while also contributing to one of the most important, ongoing situations in consumer finance.

Working With Community Banks

As Carter Dougherty has written at Bloomberg, Elizabeth Warren has worked closely with community banks. This has been a conscious effort to include their concerns in the process.

Community banks had two main objections during the fight to create the CFPB. The first was that they didn't need a new regulator because they already had several focused on consumer regulation. The second was that they didn't cause the crisis; the crisis was generated by the shadow banking sectors of fly-by-night mortgage originators, originators that Greenspan could have regulated but chose not to. One can imagine the community bankers being skeptical of someone promising to consolidate regulators, thus upsetting established bureaucrats, as well as taking on something that regulators have ignored in the past.

By all accounts, Warren is making inroads. The whole idea was based on regulatory consolidation from early on. If you look at what Elizabeth Warren wrote for the Roosevelt Institute's Make Market Be Markets conference, it was clear this was a goal of hers. You can see that she gets their concerns in her Politico op-ed, which was well received.

New Potential Allies

Rep. Jeb Hensarling (R-TX) has called the bureau a "consumer credit rationing agency." Reading his critique and other conservative GOP critics on the topic, I'm almost surprised by how impersonal their criticism is. If it was anyone else, they would still be trying to go after the CFPB's budget, scope and independence.

And many Republicans even seem to be warming to Warren. Rep. Randy Neugebauer (R-TX) has said, "She wouldn't be my last choice. I don't know whether she's my first choice, but she certainly wouldn't be my last choice... If [the Consumer Financial Protection Bureau] isn't going away, then what we have to do is deal with what we've got, and I think it's easier to deal with an agency where we have a little bit more permanency about its operations..." Which isn't that bad. She discussed consumer finance in a press release with Republican Senator Snowe. The Wall Street Journal seems almost surprised by how much outreach Warren is doing with the GOP. She has done extensive outreach to State Attorneys General, both Republicans and Democrats. She's emphasized transparency in her work as well. She is as well-respected by the GOP as any effective leader is going to be.

I'm never a good judge of conventional wisdom, but if it's that Warren can't get through the Senate, I think it's wrong, or at least very overstated. I think she'll have a better shot than anyone else. Warren and the CFPB aren't on the tea party's radar, and the Chamber has had real difficulty astroturfing this topic. The left is energized about this nomination, even more so since the strong role the CFPB will need to play in foreclosure fraud and servicing regulations has become clear. So what's the downside of her being the nominee?

Mike Konczal is a Fellow at the Roosevelt Institute.

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FCIC Report: Ownership Society as Bridge to a Permanent Republican Majority

Jan 31, 2011Mike Konczal

While the GOP now tries to blame the crash on government sponsorship of homeownership, it was part of their strategy to turn the country into homebuyers -- and Republicans.

While the GOP now tries to blame the crash on government sponsorship of homeownership, it was part of their strategy to turn the country into homebuyers -- and Republicans.

Brad Miller has a post at Huffington Post called "Republican Amnesia on the Financial Crisis." The important story is that that during the 2000s, conservatives and libertarians hated the CRA and the GSEs because they believed that these institutions blocked or slowed the ability to give loans to poor people. After the crash, the right did an immediate about-face, blaming these institutions for lending too much.

I'm not making that up. Check out the Miller post. I've been documenting this for a while. As Cato put it in 2003, " increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high." Bill Black walks through Wallison's turnaround on everything, and the GSEs in particular, here and here.

Meanwhile, David Frum is reading the FCIC report. His post on the CRA, "Did Washington Push Banks to Make Bad Loans?," ends with the quote: "George Bailey of It’s a Wonderful Life retired from mortgage lending forever. In the new anonymous securitized market, high-flown liberal egalitarian ideals became the material out of which self-interested and consequence-indifferent financial engineers built the biggest economic bomb since World War II."

Firstly, and the FCIC report emphasizes this in passing, but we had a credit bubble, and bubbles showed up everywhere, not just in housing. Secondly, I'm actually surprised that the FCIC didn't cover deregulation and securitization, considering they do cover the deregulation in the early 1980s that led to the S&L crisis. The private securitization market was the creation of the early Reagan administration, specifically through the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA) in which Congress preempted a variety of state laws that inhibited private home mortgage securitization.

Ownership Society

But to the point, we need to distinguish between the idea that a regulator made the financial system do something versus turning a blind eye while the financial system did it on its own. Regulators didn't step up when the subprime market, the housing bubble, the CDO market, or the shadow banking system were all growing quickly, in part because they believed these things would regulate themselves. Greenspan was certainly of this belief. Being able to say that you were promoting homeownership was a great tagline for both parties, but that's a side effect of letting the market spin out of control.

But are "high-flown liberal egalitarian ideals" the reason that subprime mortgages and homeownership were pushed so hard and got so big in the 2000s, while regulators did nothing? Let's look at George W. Bush's 2004 Ownership Society fact sheet, and what I would characterize as the four-legged stool of The Ownership Society: tax cuts for the wealthy, health savings accounts, privatizing Social Security, and mass homeownership. Homeownership is a big deal in the fact sheet:

...The President believes that homeownership is the cornerstone of America's vibrant communities and benefits individual families by building stability and long-term financial security... The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade...

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What he really promoted was homebuyership, not homeownership. But politically, why was this a big deal for Republicans? Egalitarian concerns? As the historian Rick Perlstein found in a 2005 special Ownership Society edition of the American Enterprise Institute's magazine,  Grover Norquist wrote that:

Bush's vision also calls for efforts to increase homeownership. Here's a hint of what that could mean: in House Speaker Dennis Haster's Congressional district in Illinois, 75-80 percent of voters own their own homes. In Democratic minority leader Nancy Pelosi's district in San Francisco, the number is 35 percent... A transition of great political importance is under way. Fifty years from now the move to an Ownership Society will be recognized as a change to America's political landscape as dramatic as the move from farms to factories.

Here's James Glassman:

Bush wants more ownership because he wants to change the shape of America. He understands that people who own stocks and real estate -- who possess wealth of their own -- have a deeper commitment to their community, a more profound sense of family obligation and personal responsibility, a stronger identification with the national fortunes, and a personal interest in our capitalist economy. (They also have a greater propensity to vote Republican.)

Here's more from what Perlstein found in that 2005 American Enterprise Institute magazine (my bold):

The places with the higehst levels of homeownership generally vote Republican.... "Our analysis shows that this connection between homeownership and voting Republican holds broadly at every level--from large regions all the way down to metro areas....more and more of the places offering new homes to young families following their dreams are in the heart of Red America." Not wanting to own your own home is revealed as downright European; Kotkin singles out Prague's homeownership rate at "about 12 percent." No Republicans there! He concludes by calling cities like Fresno, Orlando, Dallas, Houston, Phoenix, Las Vegas, and Atlanta "Our New Cities of Aspiration" -- "the de facto headquarters of the American dream."...

Once more our conservative think tank hammered home the electoral point: "Married couples with families, a key Bush constituency, had the highest rates among all groups: over 83 percent." No wonder Bush won: "Homeownership momentum continued right up to the election. Sales of new homes rose 4 percent in the fall, to an annual rate of 1.2 million units -- the third highest level on record. Sales of previously owned homes also rose to their third highest level."

Especially bustling? California, where first-time homeowners are said to "head for towns like Tracy, Modesto, and Grass Valley. Along the way, many embark on a journey that ends with them voting Republican."

They thought that getting homeownership rates up to 70% would secure a permanent Republican majority. They looked at the data and saw that suburban homeowners are more worried about tax issues, crime, and tend to vote more conservative on economic issues, and they thought they could let the financial sector do its thing and turn a critical mass of swing voters into suburban bourgeois tax-haters. There's an element of the GI Bill and post-war suburbanization in this strategy, which was designed in part by the GOP to get people to the new suburbs and weaken the power of Democratic city bosses.

They actively applauded themselves for pulling off this distinctly political project in their magazines. And then they blame poverty programs and the idea of government when it all collapses.

Mike Konczal is a Fellow at the Roosevelt Institute.

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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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