Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Not to knock CNBC, since I like many of the reporters, anchors and producers there, but GE does own CNBC. While they are doing a very good job examining this meltdown, they still allow the blowhards to come in and "pump up" and support Wall St. Bloomberg is good as well, but no one is digging deep enough below the surface. Seeing who knew what, when and where and why this is happening?

Servicing fraud and my reports in the late 90s [see predbear or AAMA report] that details the frauds and most importantly the "consequences" for everyone are important reads. Billion dollar gains for the likes of crooks like Ace Greenberg and James Cayne and Bear's rise from a $10 a share stock to over $180 a share in a little over a decade should have been a big red flag and hell, I wne to all and them and said the mortgage sky will fall, the mortgage sky will fall, but few, if any listened...

World economy: Credit crunch fallout begins to spread
By Nick Beams
24 August 2007

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While stock markets have stabilised—at least for the time being—the effects of the credit crunch sparked by the crisis in the US subprime mortgage market are now working their way through the banks and financial institutions and the economy as a whole.

This week, the financial fallout spread to Britain where HBOS, the owner of Halifax and Bank of Scotland, announced that it would extend credit to Grampian, a $37 billion debt-financed fund, or conduit, which deals in repackaged loans, including mortgages, credit cards, and motor loans. The bank said the funding would continue until market finance improved to an acceptable level.

In Germany, where two banks IKB and SachsenLB have already been hit by the liquidity crisis, it is clear that the problems extend deep into the financial system. As a report in Monday’s Financial Times noted: “SachsenLB and IKB may have been small players but the impact of their downfall and the embarrassment faced by the Bundesbank [Germany’s central bank] have spread far beyond Germany. Financial markets and policymakers have been left worrying whether further bank crises are lurking and whether bank regulators are really in command of the facts.”

According to Alexander Stuhlmann, the chief executive of WestLB, another state-owned regional bank, the situation facing the German banks was “not uncritical.” “We sense a reluctance on the part of foreign partners to extend credit to German banks,” he said. “If we have a banking crisis in Germany with other countries cutting us off, then other banks will also face difficulties.”

The German banking system has been among the hardest hit by the credit crisis because of the moves over recent years by smaller banks, particularly the state-owned Landesbanken, to counteract the effects of a downturn in the domestic market and increased competition pressures by engaging in riskier financial investments. While the major Landesbanken are outside the top 30 of Europe’s biggest banks, they all rank among the top 30 conduit sponsors.

The problems in the banking sector have led to calls from industry for the European Central Bank [ECB] to cancel a rise in interest rates planned for next month. According to the German Chamber of Industry and Commerce (DIHK), banks had already tightened lending standards and raised borrowing costs for small companies.

Issuing a plea that the ECB not raise rates, DIHK chief economist Axel Nitschke said: “What we are seeing in the credit markets is likely to have a major effect, damping economic dynamism in coming months, not just in Germany but across the world.” He said the DIHK had been receiving distress calls from middle-sized German companies back in June.

The flow-on effects of the crisis on the broader economy were also the subject of a warning by John Lipsky, the number two official at the International Monetary Fund. Speaking to the Financial Times, the IMF first deputy managing director warned that the financial market turmoil would “undoubtedly dampen economic growth”. While so-called “emerging markets” had so far withstood the crisis, he added, it was “far too optimistic” to assume that there would be no impact at all.

There would be no quick end to the turmoil because of the uncertainty as to how much damage it would do to economic growth. There were also dangers for the entire financial system caused by the lack of transparency on the part of the banks as to the true extent of their exposure to riskier investments.

“Lack of transparency can create doubts that translate into market volatility,” Lipsky said. “We are finding that in some cases regulated financial institutions are carrying off-balance-sheet risks that have indirect implications for those institutions.” This had caused uncertainty about the level of risk born by major institutions, which contributed to the drying up of liquidity in parts of the financial market.

As far as the broader economy is concern, the chief fear is that the slump in the US housing market will lead to a fall in consumption spending and the onset of a recession. On Thursday, Countrywide Financial’s chief executive Angelo Mozilo warned that the housing market was showing no signs of improvement. Asked if this could bring about a recession, he said: “I think so ... I can’t believe ... that doesn’t have a material effect.” There was a “very serious situation” in the US housing market and the environment was “certainly not getting better.”

The latest industry figures and surveys bear this out. The median price of new homes has fallen from $262,000 in March to $237,000 in June—a decline of nearly 10 percent in just three months—while the overhang of unsold homes is equivalent to 7.8 months’ supply.

According to the data firm RealtyTrac, the number of US homes facing foreclosure increased by 58 percent in the first six months of the year. In all, 573,397 properties faced some kind of foreclosure activity in the first half the year, including notices of default, auction sale notices, or repossession by lenders. And the number of foreclosure filings could rise to 2 million by the end of the year.

The housing slump is impacting on other areas of the economy as profit warnings by Wal-Mart, Home Depot and Macy’s indicate. Car sales in July were the lowest in nine years.

Some of the processes at work in the mortgage crisis and in the US economy as a whole were revealed in an article on income figures published in the New York Times on Monday. An analysis of tax statistics revealed that the average income in 2005 was still 1 percent less than in 2000 after adjusting for inflation. This was the fifth consecutive year that American wage-earners had made less money than at the peak of the last cycle of economic expansion in 2000. This was a “totally new experience” in the post-war period, which saw total incomes listed on tax returns grow every year, with a single-year exception, until 2001.

These statistics make clear why the housing bubble, which played such a decisive role in the growth of the US economy since the recession of 2000-2001, was destined to collapse. While house prices and consumption spending in general were being inflated by the expansion of credit and lower interest rates, real income for the vast majority of working people in the US was going in the opposite direction, creating the conditions for a “scissors crisis.” Now the bursting of the bubble has set in motion economic forces that could bring a recession not only in the US, but in the world economy as a whole.

WSWS : News & Analysis : World Economy
Credit crisis claims another bank
By Nick Beams
20 August 2007

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The collapse of the market in US subprime mortgages has claimed another European victim. On Friday it was announced that SachsenLB, a bank owned by the German state of Saxony, had to be bailed out to the tune of 17.3 billion euros ($23.3 billion).

The rescue was organized by a group of Germany’s most powerful savings banks after SachsenLB’s investment conduit, Ormond Quay, was unable to raise funds because of its American subprime mortgage exposure.

“The ongoing market disruption in selling asset-backed commercial papers resulted in there being doubt on securing funding for the Ormond Quay conduit,” SachsenLB declared in a press statement.

The SachsenLB bailout follows the financial rescue earlier this month of the 84-year-old IKB Deutsche Industriebank, after its affiliate, Rhineland Funding, was unable to sell commercial paper because of its exposure to investments based on US mortgages.

The IKB bailout was organized through the German bank regulating authority, BaFin, which warned that, had the bank gone under, Germany could have faced its worst financial crisis in 75 years. IKB is believed to have an exposure of 17.5 billion euros ($24 billion) to US subprimes and could lose up to one fifth of its investments.

The demise of the IKB and SachsenLB investment conduits is the outcome of two factors: a downturn in profitability in the German economy in the first half of this decade, and the attempt to overcome the problem through the development of new financial mechanisms based on American practices, and promoted by US-based credit rating agencies.

Five years ago, IKB was a small bank providing long-term finance to the so-called Mittelstand, a cluster of soundly based, but relatively small German companies. In 2002, at the urging of credit ratings agencies, IKB moved to counter a fall in profits by diversifying from lending to the Mittelstand firms and turning to investments in financial markets. The vehicle for these new operations was Rhineland, which was set up so that it could borrow from investors in both the US and Europe.

Rhineland’s profits were derived from the difference between the interest rates it paid on its commercial paper issues and the return on its purchase of bonds. Rhineland expanded rapidly. In September 2003, it held 4.8 billion euros in debt. By January 2006, its holdings had expanded to 9 billion euros.

The credit-rating agencies were pleased. In December 2006, Moody’s Investor Services praised IKB for its efforts and noted: “IKB has over the last few years been successfully diversifying its business activities by expanding outside Germany.” Just nine months later it was to be at the very centre of potentially the biggest financial crisis since the dark days of 1931.

The history of SachsenLB, one of Germany’s state government-owned Landesbanks, reflects the operation of the same “free market” forces. The Landesbanks pursued a business model based on their ability to secure the highest credit ratings due to their government backing.

Higher credit ratings meant they paid lower interest rates on their borrowings than their commercial rivals. So the Landesbanks were able to undercut their rivals in the issuing of loans.

Their business model, however, was undermined four years ago by the insistence of the European Union that the German government end its indirect subsidies and institute, instead, a “level playing field.” The EU’s decision, which came into effect last month, has forced the Landesbanks to undertake riskier ventures.

The impact was particularly hard on SachsenLB, which saw its credit rating downgraded to BBB+, the lowest of any bank. An article published on this development in the Financial Times on July 15 noted that bankers had emphasized at the time that “no immediate crisis is looming.” Just over one month later, SachsenLB has been bailed out, and no one can be sure it will be the last such institution.

The same concern is being expressed around the world in the wake of the turmoil that gripped global financial markets last week. Despite initial upbeat assessments following the US Federal Reserve’s intervention to cut a key interest rate on Friday, serious questions are beginning to be posed.

In a comment published in the Washington Post on Sunday, Edward Chancellor, an editor with the financial commentary service, took issue with the conception that the economy “will trundle along just fine, regardless of what happens on Wall Street.”

He wrote: “It’s true that some panics pass without consequence. But there are times—think October 1929—when the tremors on Wall Street anticipate a more widespread economic storm. Given the tremendous run-up of debt in recent years, there’s a good chance that today’s credit crunch will turn out to be more than just a wisp of cloud in an otherwise blue sky.”

Chancellor challenged the claim by US Treasury Secretary Henry Paulson that the recent market turbulence would have little impact—a view based on the assumption that the credit crunch was “merely a passing liquidity” event. There was a good chance the current credit panic could become something more, because it resulted from the collapse of a previous property boom.

“I believe that something profound has happened in recent weeks,” he concluded. “The credit system is losing its, well, credibility. People no longer trust the triple-A ratings that many complex debt securities carry. The risk models used by rating agencies, hedge funds and banks have also come under suspicion. The effects of subprime losses are being felt in unexpected places, including supposedly impregnable money market funds. Hedge funds and other highly leveraged investment vehicles are being forced to unwind. After years of excess, credit is beginning to contract.”

Well-known Financial Times columnist John Plender expressed similar views in a comment published Saturday. According to Plender, it would take more than a rate cut by the Federal Reserve to halt the crisis. Plender disagreed with the views of the “optimists” that the subprime mortgage market was too small to inflict serious damage on the financial system.

“The trouble with this cheery view,” he wrote, “is that the crisis is about much more than the subprime mortgage market. There has been a systematic deterioration in credit quality as a result of financial innovation. Banks now routinely sell their loans, which are then packaged into all manner of complex products designed to satisfy investors’ demand for income at a time when yields on virtually all investments have fallen to very low levels.”

It was “too early to say” whether the credit crisis would bring a US and global recession, but something more than Friday’s interest rates cuts by the Fed would be needed to “keep this financial show on the road.”

While it is not possible to make exact predictions, some conclusions can already be drawn from the unfolding crisis. During television coverage of the market slide, one commentator noted that a Brazilian bank seeking credit had been asked whether it held any “American debt”—the implication being that if it did, it would receive no finance. Such events are taking place around the world—a measure of both the historic decline of American capitalism and the destabilizing impact of its demise on the global capitalist economy as a whole.

Ten years ago, when the so-called Asian financial crisis was erupting, the former US Federal Reserve Board chairman Alan Greenspan hailed the virtues of the “free market” American model over the system of regulated or, as he dubbed it, “crony capitalism.” A decade on, it is precisely this American model that has precipitated a global crisis.

Worldwide market panic compels central banks to intervene
By Patrick Martin
13 August 2007

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The world financial system remained on a precipice over the weekend, awaiting the opening of markets Monday, after central banks in Europe, the United States, Japan and several other Asian countries were compelled to intervene Thursday and Friday with massive commitments of funds to stave off a global panic.

A total of $323 billion was poured into the markets over two days, an injection equivalent to that carried out in the aftermath of the terrorist attacks of September 11, 2001. The bailout came too late to stem the fall in Asian and European markets, but the New York Stock Exchange rallied after a fall of nearly 200 points, with the Dow Jones average ending 31 points down. For the week, the US market was virtually unchanged after a series of colossal moves up and down, including Thursday’s plunge of 387 points.

European and Asian markets ended Friday’s trading down between 2 and 4 percent before the second round of support from the European Central Bank (ECB) and the US Federal Reserve. The FTSE index of London stocks dropped 3.7 percent, the French CAC index fell 3.1 percent, while Germany’s DAX declined 1.5 percent. Japan’s Economy Minster Hiroko Ota told reporters, “The effect of US subprime loans is spreading to financial markets around the world.”

The ECB and the Fed had to intervene Friday as it became clear that Thursday’s actions had failed to stem the rout. The ECB followed Thursday’s $130 billion in loans with an additional $84 billion, while the Fed injected $38 billion on top of Thursday’s $24 billion worth of support.

Friday’s Fed intervention came in three stages—$19 billion in the morning, $16 billion more in the early afternoon, and $3 billion towards the end of the trading day, indicating that the central bank was gauging the effect of its actions hour by hour and reinforcing its support when the market began to give way again.

While the sums expended by the central banks were far larger than their everyday operations, the amounts are small compared to the scale of world financial markets—an estimated $175 trillion in stocks, bonds and other debt instruments—and the trillions in paper value already wiped out in the convulsions of the past several weeks.

The events of Thursday and Friday demonstrate that, despite the common desire to forestall a chain reaction collapse of the world financial system, the various central banks have differing and in some cases directly conflicting agendas based on disparate national policies and concerns.

The European Central Bank, for example, pumped more than three times as much into the financial system as the US Federal Reserve, although European and American markets are approximately the same size and the immediate focus of the financial crisis is in the United States, with the collapse of the market for securities based on subprime mortgages.

The major concern in Frankfurt was the shaky state of confidence in the continent’s banking system, with the state-organized bailout of the German IKB Deutsche Industriebank followed by the announcement by BNP Paribas, the biggest publicly held French bank, that it was suspending redemptions from three of its hedge funds caught up in the US mortgage market crisis.

The IKB crisis was a direct product of the American mortgage-lending debacle, as the regional bank, specializing in lending to small and medium companies, had become deeply committed to the US property market. Der Spiegel magazine reported Friday that IKB and its affiliates had more than $10 billion in loans to the US mortgage sector, twice the previous estimate, including nearly $8 billion invested by Rhineland Funding Capital Corporation, which is managed by the bank.

The German government and the national central bank, the Bundesbank, organized a bailout of IKB, with credits totaling nearly $10 billion routed through the state-owned KfW bank, which owns the majority of the shares in IKB. Prosecutors in the Ruhr capital of Düsseldorf have begun a criminal investigation into IKB’s operations, and the bank’s chief financial officer resigned August 7, eight days after CEO Stefan Ortseifen.

The biggest German private bank, Deutsche Bank, announced Friday that the value of its DWS ABS investment fund fell 30 percent, although it did not follow the example of BNP Paribas in suspending redemptions. Ominously, the bank said that the American subprime mortgage crash was not the immediate cause of the losses, but affected the fund indirectly because “The uncertainties surrounding the US mortgage crisis has constricted liquidity.”

While the European Central Bank intervened massively, the Bank of England, by contrast, did nothing Thursday or Friday. It was the only one of the world’s major central banks to offer no support to the financial markets. The Japanese central bank offered relatively minimal support, about $8 billion, while central banks in smaller countries like Canada and Australia mustered greater support in proportion to their own resources.

The role of China, whose central bank has accumulated assets of over $1.1 trillion, is potentially critical in this crisis, and there was widespread consternation and comment in financial circles after the British newspaper Daily Telegraph published a report August 8 that the Chinese government “has begun a concerted campaign of economic threats against the United States,” and was hinting that it might liquidate its holdings of US Treasury notes if Washington imposed trade sanctions, as demanded by Democratic congressional leaders and presidential candidates.

A Chinese central bank official issued a statement declaring, “US dollar assets, including American government bonds, are an important component of China’s foreign exchange reserves as the dollar enjoys a major position in the international monetary system based on the large capacity and high liquidity of US financial markets.” That such a statement had to be issued at all is extraordinary. Moreover, it suggested a more modest role for the US dollar, failing to refer to it as the major world reserve currency.

In the United States, the Federal Reserve’s public posture has been to downplay the seriousness of the crisis. The Fed’s board of governors met Tuesday and decided to leave interest rates unchanged, issuing a statement reiterating that inflation rather than financial instability was still the main danger to the US economy.

On Thursday, the Fed belatedly pumped $24 billion into the financial system as the New York Stock Exchange was plunging. On Friday morning, after Asian and European markets had plunged further, the Fed began further efforts to increase liquidity and issued a statement that it “is providing liquidity to facilitate the orderly functioning of financial markets.”

In a highly unusual move, the entire $38 billion the Fed expended Friday was directed to purchasing mortgage-backed securities, which might otherwise have gone without buyers. The two-day total of $62 billion compares to a daily average of $75 billion during the week after the September 11, 2001 terrorist attacks.

Despite the brief respite in the stock market rout Friday afternoon, the full impact of the crisis in US mortgage-based securities is still to be felt. Two large home mortgage firms, Countrywide Financial, the largest, and Washington Mutual filed declarations Thursday night with regulatory agencies that they were having difficulty funding new home loans. The stock price of both companies fell precipitously Friday.

Another large home lender, HomeBanc of Atlanta, Georgia, filed for bankruptcy Friday, showing debts of $4.9 billion. Its creditors included both a long list of American financial institutions—the largest being Fidelity, the biggest mutual fund—and such European banks as the German Commerzbank, the French BNP Paribas and the Dutch-based Fortis.

“Recent disruptions in the mortgage loan and real estate markets have been dramatic, in terms of both magnitude and timing,” CEO Kevin Race said in a statement. HomeBanc was now in an “untenable business position” and would seek “an orderly wind-down of the company.”

Wall Street financial markets have become indissolubly linked to the financing of home mortgages in the last eight years, as the process of “securitization” of mortgages has become widespread. Mortgage lenders no longer hold mortgages to maturity, collecting monthly payments. Instead, they sell the mortgages to the huge federally backed mortgage repackaging companies, Fannie Mae and Freddie Mac, or directly to hedge funds and other financial institutions. In 2006, Wall Street firms issued $773 billion in mortgage-related securities, according the Securities Industry and Financial Markets Association, up from $217 billion in 2001.

The subprime market accounts for about $2.5 trillion in lending, much of which is expected to go into default in the next six months. About ten percent of all subprime borrowers are already behind on their payments, with $212 billion in loans in default through May and another $325 billion estimated to default in the future.

Mortgage lending using highly leveraged instruments like option Adjustable Rate Mortgages (option ARMs) and interest-only ARMs has skyrocketed, with $581 billion in option ARMs in 2005 and 2006 and nearly $1.4 trillion in interest-only ARMs.

For a period of time, this suited both the low-income borrowers, who could afford to buy a house, perhaps for the first time, and billion-dollar lenders, who reaped enormous paper profits since they could book the interest payments and record the principal as assured by the underlying value of the house.

With the slump in home prices over the past year, however, it has become impossible to disguise the deterioration of the market. Homeowners struggling to make payments can no longer refinance their mortgages easily to avoid default. And these defaults are not only leading to foreclosures and a glut of unsalable houses, they are compelling many home lenders to erase profits that they have already booked under the lax accounting rules that allow them to record income even on loans where money is not coming in.

The credit crisis could have a more immediate effect on the stock markets next month, when bank commitments to finance nearly $300 billion in corporate takeovers, mainly by hedge funds and private equity firms, will fall due. In the current liquidity squeeze, the banks may be compelled to revoke some of the loan agreements and pay huge cancellation fees, or they may have to finance the loans from their own capital, putting their own solvency at risk.
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