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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Nye Lavalle

From The Times
January 21, 2008
Day of reckoning in the US glasshouse
World Economic Forum: The Davos Agenda
Jospeh Stiglitz
There is a growing consensus: America is going into a marked slowdown, if not a downright recession. There will be a large gap between potential growth – usually estimated at 3 per cent to 4 per cent – and actual growth, meaning lost output of hundreds of billions of dollars. America actually faces three separate but related problems; a credit crunch, a debt crisis and a macro-economic problem.

A decade ago, America roundly criticised the countries of East Asia for their lack of transparency and inadequate regulation. But, as the old aphorism goes, people in glass houses shouldn’t throw stones. Money was lent to hundreds of thousands of Americans beyond their ability to pay. What was called financial innovation meant that borrowers didn’t even have to pay the accrued interest; at the end of the year, they owed more than at the beginning. Liar mortgages had been invented, requiring no evidence of income or ability to pay.

Borrowers were told not to worry about their mounting debt. With prices going up year after year, the more they borrowed, the more they made. What was true was the more they borrowed, the more the mortgage brokers and the banks made. It was, in a sense, an old-fashioned pyramid scheme: prices simply couldn’t go on rising, especially as the real income of most Americans was actually declining. Low interest rates fed the bubble, but that was not enough: the Chairman of the Fed actually encouraged people to take out variable rate mortgages (where payments would go up as interest rates increased), just when interest rates were at an all-time low. They had only one way to go, and that was up.

Then these “toxic mortgages” were sliced and diced, bundled and rebundled, in complex securities. The bankers seemed, for a moment at least, to believe in financial alchemy. Take a bad mortgage, blend it with an A-rated security and the mix got an A rating from the credit agency.

What, one has to ask, were they thinking? They were trying to defy the laws of economics: how could individuals pay more on their mortgages than their income? I, and others, repeatedly pointed out that this simply could not go on. A day of reckoning had to come; it has now arrived.

For the Fed and the Bush Administration, the answer to what they were thinking is easy: they needed the profligate borrowing to keep the economy going, even with Bush’s huge deficit spending. The game was called “kick the ball down the road”.

The hope was that, somehow, the real estate bubble would not blow up during their watch and that somehow the others could be postponed, too. The war had driven up the price of oil, so more of America’s income was going to Saudi Arabia and other oil producers, and less on American goods. The war expenditures themselves stimulated the economy far less than money spent on, say, the infrastructure (such as New Orleans’s levees).

The Bush tax cuts for the rich provided little stimulation. The toxic mortgages and the housing bubble allowed Americans to consume 100 per cent of their income and savings dropped to zero for the first time since the Great Depression.

The game is up. Even if the Fed were to lower interest rates, banks will not be willing to lend and households will not be willing to borrow in the manner they did before. House prices are falling – in some parts of the country, they are plummeting. Some experts are predicting a pricing correction of 50 per cent or more.

It was all fed, of course, by securitisation – the notion that somehow by bundling bad mortgages together you get a good product. But the new religion of securitisation ignored two elementary realities.

First, diversification only works to reduce risk if risks are not correlated, but, when housing prices start to fall, all of the sub-prime mortgages turned sour together. Second, securitisation creates asymmetries of information, where those buying the securities know less than those originating them. In the old days, when banks held the mortgages they originated, they had an incentive to make sure that they were good loans.

But with securitisation, if you could find enough fools to take bad mortgages, you had every incentive to lend as much as you could. What is remarkable is how many fools (including banks with supposedly good risk management systems) there were. That game, too, is up, at least for the duration.

Let’s be clear: this is not just an ordinary economic downturn, an inventory cycle where firms have accumulated excess inventories. In this case, banks have suffered a major hit to their balance sheet and, given the lack of transparency, we don’t yet know how big a hit. But we know there is some missing matter: with more than two million anticipated foreclosures, the losses are likely to run to much more than the banks have announced so far.

Moreover, there is a vicious circle: foreclosures drive down housing prices, leading to more foreclosures. And as individuals find it increasingly difficult to make mortgage payments (as interest rates get “reset” automatically at higher rates, a built-in feature in millions of these mortgages) and as the economy slows down, the problems will spread to other credit markets. Indeed, this is already happening.

It is likely that America’s zero savings will return to a more normal level, 5 per cent or so. This will exert an enormous drag on the economy. If it happens rapidly, the downturn will be sharp; if it happens more slowly, the downturn will be prolonged. Investment in real estate, too, will be depressed for years to come. Other investment is not likely to increase sufficiently to offset, especially with banks restoring higher lending standards.

America has already exported some of its problems: banks around the world bought its toxic mortgages; globalisation has meant that rising risk premiums and the credit squeeze have had global consequences. For good reason, confidence in America and its currency have declined; but this makes it more difficult for Europeans to export, easier for imports to compete. The exchange rate adjustments and the resulting reduction in America’s imports will temper its downturn but will not be sufficient to offset weak consumption and investment.

Even the Fed is beginning to realise that, although misguided monetary policy and inadequate financial regulation got the US into the mess, reversing course will not get it out. (In a classic case of shutting the barn door after the cows are out, regulations have now been tightened. It has admitted, in effect, that it was asleep at the wheel.)

Can fiscal policy do the trick? President Bush’s cureall for any of the nation’s ills – making the 2001 and 2003 tax cuts permanent – will drive up the deficit but not the economy. In some sense, they are at the root of the problems that have ensued. Tax rebates for lower-income Americans will have the biggest stimulant per dollar of deficit (in the jargon, the biggest bang for the buck). And it will be fast-acting.

But will the Bush Administration, so long focused on helping the rich, be willing to change course? And is it wise to encourage America on its consumption binge? What America desperately needs is more investment, in infrastructure, in research, in education. This, too, would provide a big bang for the buck. But while defence spending has soared, including billions for weapons that don’t work against enemies that don’t exist, will it be willing to countenance more government spending in these areas?

This is an election year and anything is possible. My betting is that the Administration won’t want to admit just how bad the economy is, and that even if a compromise is achieved, it will be too little too late.



Joseph Stiglitz is University Professor at Columbia University. He was chairman of the US Council of Economic Advisers and Cabinet member in the Clinton Administration. A former chief economist of the World Bank, 1997-2000, he won the Nobel Prize for Economics for his work in information asymmetries and is author of three global bestsellers; Globalization and its Discontents, Making Globalization Work and The Roaring Nineties. His latest, with Linda Bilmes, of Harvard, is on the mounting costs of the Iraq war. It is published in late February, in commemoration of the fifth anniversary of the war, by Penguin/Allan Lane.
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JCD
Nye:

That's a keeper. Superb explanation for the most part. There are a few missing elements but that's okay, as their inclusion would make it too long to capture most reader's attention for the entire article.

Great find! Thanks for posting!

Jon


  
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If I'm not mistaken, Professor Stiglitz advised the Edwards campaign. Possibly why the campaign addressed Mortgage Servicing Fraud specifically.

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