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Joe B
Foreclosure figures overstate crisis

The Atlanta Journal-Constitution
Published on: 10/14/07

A California company recently reported Georgia foreclosures had jumped by an alarming 75 percent from June to July, branding the state with the nation's second-highest foreclosure rate.

But there was one problem: The numbers were wrong.

RealtyTrac, one of the nation's leading sources of foreclosure statistics, reported 12,602 July foreclosure actions for Georgia. But that total counted more than 2,000 properties twice, and sometimes more, The Atlanta Journal-Constitution found in a review of the data.

There is little dispute that Georgia faces a foreclosure crisis, but the company's July report overstated the magnitude of the problem. After a preliminary investigation, the company said Friday that its data show foreclosure filings in July actually rose by 14 percent — not by 75 percent.

A RealtyTrac executive acknowledged the mistake in an interview Friday.

"What we're doing isn't perfect," said Rick Sharga, the company's vice president of marketing.

"It's the best we can do, and we keep trying to get better."

Sharga said the Irvine, Calif., company would correct the Georgia numbers and determine if a similar problem has skewed its statistics for other states.

Problems with RealtyTrac's statistics didn't begin or end with the July report. The Journal-Constitution also identified problems in the company's more recent Georgia data.

Last week, RealtyTrac reported 11,926 Georgia foreclosure actions for September. But the newspaper found that count included more than 2,200 duplicate entries.

Sharga said the problem appeared to be linked to its use of a new data provider.

"We don't minimize the responsibility of issuing these kind of statements," Sharga said. "We try and be as diligent as we can."

Economists and some state officials have questioned RealtyTrac's methodologies before. Even so, the small California marketer remains the national media's go-to source on foreclosure statistics. Even Congress, as it tries to quell the nation's mortgage meltdown, relies heavily on the data.

That's because no one else offers frequently updated foreclosure statistics that drill down to local areas.

"There are very few sources," said Israel Klein, spokesman for the Joint Economic Committee of the U.S. Congress.

RealtyTrac said it also provides data to the Federal Reserve, the Federal Deposit Insurance Corp. and the FBI.

At a time when mortgage failures top the public agenda, no one knows the precise scope of the problem.

No government agency collects nationwide foreclosure statistics. The Mortgage Bankers Association reports quarterly on delinquent mortgages and foreclosures, but its survey covers only 80 percent of mortgages and does not include a breakdown below the state level. Other organizations use credit files and lender surveys to produce estimates.

Some experts worry that the media and lawmakers rely too heavily on the company's data.

"Their numbers do overstate the level of activity, and it's affecting public policy," said Douglas Duncan, chief economist for the Mortgage Bankers Association.

Mark Zandi, chief economist at Moody's, said the government should track foreclosures itself, because available data are "completely inadequate. ... It's impossible to make good policy if you don't have good data."

Zandi said lawmakers need more than simple foreclosure tallies; they need to know what types of loans and borrowers are failing.

RealtyTrac purports to capture more of the nation's foreclosure listings than any other source. That requires a massive data collection effort from thousands of courthouses and newspapers.

"It's a very difficult thing to do well and get right," Zandi said. "They are dealing with 50 different states, all with very different foreclosure processes."

A foreclosure is a process, not just a one-time event. Lenders in most states must take several steps before repossessing a home, usually including more than one public notice. Homeowners can avert foreclosure by filing for bankruptcy, refinancing or selling the home.

In many other states, which require court action before a foreclosure, court records are a reliable source for foreclosure starts.

But in Georgia, no court or government agency gets involved. The only way to compile foreclosure statistics is to review legal notices in local newspapers advertising foreclosure auctions.

Even Georgia's top banking official has no idea how many foreclosures are pending in the state.

"We don't have an accurate way to gather that information," said banking commissioner Rob Braswell.

Difficult comparison

How Georgia and metro Atlanta foreclosures compare to the rest of the nation is unclear.

RealtyTrac's 2007 reports have ranked Georgia among the top 10 states for highest rate of foreclosure actions.

The Mortgage Bankers Association's most recent report ranked Georgia in the top 10 for past-due loans and foreclosure actions.

Moody's ranked Georgia 21st in the third quarter of 2007 for mortgage loan defaults, placing it below the national average. But ranked Georgia in the top five for its rate of mortgages with past-due payments, indicating that a higher rate of defaults may be coming.

RealtyTrac, formed in 1996, is a relative newcomer to the world of real estate statistics. It provides lists of foreclosed properties to consumers who would otherwise have to wade through court documents or newspaper records to find potentially bargain-priced homes.

RealtyTrac's monthly reports, widely cited by news outlets, bring visibility to the company's services and drive traffic to its Web site, where potential home buyers and investors may review local foreclosure listings. The company also offers a subscription service and sells data to investment and financial firms.

The nation's mortgage meltdown has drawn more attention to RealtyTrac's reports than the company ever envisioned.

"If we had known the report was going to get this popular and have this much scrutiny, we probably would have built it with more hard and fast rules in the first place," Sharga said.

'Very confusing'

Some experts have questioned the company's methods for some time.

After RealtyTrac consistently placed Colorado near the top of its foreclosure rankings, state housing officials started compiling their own data last year. Their tallies were much lower than RealtyTrac's.

"I think the way RealtyTrac presents the data can be very confusing," said Ryan McMaken, who supervises collection of foreclosure data for the state of Colorado.

In Colorado, a lender must file a notice announcing its intent to foreclose and a second document if the sale takes place. Colorado found that RealtyTrac counted both steps as separate foreclosure filings, even if they were tied to the same property.

"They report, in many instances, every formal action on a single property as a new foreclosure — that's double- and triple-counting in many instances," said Duncan, of the Mortgage Bankers Association.

RealtyTrac maintained the numbers were accurate and offered a way to measure every action in the process, but critics said it falsely inflated the numbers.

In response, RealtyTrac recently started offering two figures in some reports: total foreclosure actions and total unique properties involved in foreclosure actions. The change was widely praised.

In Georgia, the company's data issues run beyond the way it tallies the statistics. RealtyTrac reports a total for Georgia but it consistently collects data from only 95 of the state's 159 counties.

The company's database included only one foreclosure record for South Georgia's Jeff Davis County, for example, from January through September.

But the Jeff Davis Ledger published 35 foreclosure notices in that period.

Incomplete coverage is not isolated to Georgia. Sharga said RealtyTrac covers about 2,200 of the nation's 3,141 counties or county equivalents. That includes more than 90 percent of the nation's households, he said.

Even in the counties RealtyTrac covers every month, its numbers appear to be off the mark.

In July, RealtyTrac reported Georgia had 12,602 foreclosure filings. But a review of the company's data, which it provided to the Journal-Constitution, identified more than 2,300 duplicate records, as well as 1,700 bank repossessions that had been completed in previous months.

Lenders are not required to file a deed as soon as they repossess a property.

Sharga, of RealtyTrac, acknowledged the lag. "It's not ideal," he said. "We wish there were a better way to collect the data."

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The Credit Crisis Could Be Just Beginning
By Jon D. Markman
Special to

9/21/2007 6:40 AM EDT


Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying. One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice. I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?" Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.

Ursa Major

Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions. The cause: Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way. He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates. Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up. Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors, hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed. "Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."

The Liquidity Factory

Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and to create collateral during an era of a flat interest rate curve. Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out that these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlies derivative securities that are many, many times their size. Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheets for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan. The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers that are now accused of predatory lending practices. Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the U.S., these managers leveraged up their bets by buying the CDOs with borrowed funds. So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing. In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.

Turning $1 Into $20

The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house. These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds. According to Das' figures, up to 53% of the $2.2 trillion of commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages. When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion. Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.

A Painful Unwinding

Here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because these instruments were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets. Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral. One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle. In this context, banks' objective was to prevent customers from selling their derivates at a discount, because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers who are already thin on cash. Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments that go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works. So the structured finance market is coming undone; not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says. That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time. While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as it did Wednesday, the evidence is not at all clear. The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks. Lower rates will not help that. "At best," Das says, "they help smooth the transition."

Jon D. Markman is editor of the independent investment newsletter The Daily Advantage. While Markman cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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Satyajit Das is amazing! I want to thank Arkygirl for turning me onto him in her 9/20/07 post. 
Just put in request for his book Traders Guns and Money through our library.  Das is one
of several who have turned their backs on old derivative trading pals to warn anyone who will
listen.  Another is Frank Partnoy, also with good reads on derivatives:
  -  F.I.A.S.C.O.,The Inside Story of a Wall Street Trader 
  -  Infectious Greed: How Deceit and Risk Corrupted the Financial Markets.  Partnoy interview on how Wall St
fleeces Main Street.  This interview was recorded in 1999 !!!!!
The Promise and Perils of Credit Derivatives.
Frank Partnoy and David A. Skeel Jr.
A 45 page read but providing good insight into why MSF is a securitization issue.
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