On Responsibility

In a speech delivered February 5th, 2012 President Obama announced a  plan to help "responsible" homeowners.  The speech has 14 paragraphs and mentions "responsiblity" 9 times, including the giant headline.  I was already nauseous from the headline but had fight hard not to projectile vomit on the monitor when he said this:    "There are more than 10 million homeowners across the country who, because of an unprecedented decline in home prices, owe more on their mortgage than their homes are worth.  That's why I'm sending Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage by   refinancing at today's low rates. No more red tape or runaround from the banks. A small fee on the largest financial institutions will ensure that it won't add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust."

A one-time payment of $3,000 to a tiny fraction of 10 million underwater homeowners gets bailed-out banks square with the middle class?  I think not.  Mentioning "responsiblity" and "bailed-out banks" in the same paragraph earns Obama another cerificate to adorn his walls.  Right next to the Nobel Peace Prize.  Our President thinks the unprecedented decline in home prices is the issue, when in fact that  is exactly what is needed to align home prices with incomes.  The real issue is the unprecedented RISE in home prices that preceded this decline.  A rise completely detached from average incomes in America.   A price bubble in real estate funded by credit from the Too Big To Fail Banks (Bank of America, Wells Fargo, Citigroup, JP Morgan Chase, Goldman Sachs) and turbocharged by the the real estate finance industry (Countrywide Mortgage, etc.).  A bubble that started in 1997 and burst in 2006, setting off the finacial panic of 2007-2008 and destroying the lives, incomes and savings of millions of regular Americans.   While mainstreet America was being financially ruined by this, the banks and executives that created the bubble walked away with billions in pay and bonuses based on loan volume and artificially inflated prices.   Banks that then got bailed out by the government instead of going bankrupt to pay for all those bad loans.  Banks that are now illegally foreclosing on millions of overpriced homes, paying paltry fines while admitting no wrongdoing and bribing lobbying Congress to continue  "business as usual".  After all,  keeping their "profits" private during the bubble years and sticking the rest of America with their losses when the bubble pops is working really, really really well for these assholes. 

Allow me to illustrate. 

Average Home Prices up 120% 1998-2006

Inflation-adjusted earnings 1970-present

  You can see average incomes had NOTHING to do with home prices rising. The increase in home values was a speculative bubble created by the banks and the mortgage industry.  It was a credit bubble, in which executives at all levels of the mortgage process reaped huge rewards for approving, processing and selling loans as quickly as possible.  In fact, their incentive systems were specifically built to reward volume.  The more, the merrier and be sure to cash the bonus check before the ink is dry on the loan paperwork.  Exotic loans like Option ARM's had to be created to give people that literally didn't even have a job money to buy a house. That loan was then packaged and sold so quickly that the investor who bought it didn't realize not one payment had ever been made on the note, in many cases.  The realtors, loan originators, processors and banks all got paid up front for their services however.   The larger the loan, the more they got paid.  The "responsibility" argument goes that no one placed gun to head and forced people to buy a house they couldn't afford.  No they did not. Someone did , however, take out ads on the internet, in papers, on billboards, and even had reality shows ("FLIP THAT HOUSE!" on TLC) espousing the awesomeness of home ownership and how ANYONE can own a home.  You'd better buy now because they'll be 20 grand more next week.  Don't miss out!   Bear Stearns, which had to be rescued by the Federal Reserve and JP Morgan Chase,  was not only ignoring  their own due diligence department during the bubble, they were threatening them for doing their jobs.  An internal email from the head of Bear's mortgage backed security divsion read: 
"I refuse to receive more emails from [Verchleiser] (or anyone else) questioning why we’re not funding loans every day. I’m holding each of you responsible for making sure we fund at least 500 each and every day… I was not happy when I saw the funding numbers and I knew NY would NOT BE HAPPY... I expect to see 500+ every day. I will do whatever is necessary to make sure you’re successful in meeting this objective."

The gun was not being held to Joe Sixpack's head to buy a house.  The gun was being held to the heads of people who's jobs were to SELL loans to Joe Sixpack, income be damned, or lose YOUR job. "Responsible" people had nowhere to find affordable houses when ALL real estate in the bubble regions like Florida and California had more than doubled in five years.  Precious few (besides the ones that caused the bubble) knew how illusory these price gains were.  Budgets were made, businesses were built and homes were bought based on fraudulent and completely distorted real estate prices fueled by DEBT,  not true growth or supply and demand.  When the Ponzi scheme finally collapsed the same banks that created the crisis got bailed out.  Goldman Sachs even made millions shorting (betting that values would fall) the same mortgage-backed securities they were selling as triple A to retirement funds near you.  The American public got stuck with the bailout tab which is in the TRILLIONS and still running.  Instead of writing off part of those fraudulently overpriced loans and refinancing at today's record low rates to allow jilted homebuyers a chance to remain in their homes and help everyone recover, the Bailed-Out Banks banks are foreclosing on millions of properties.  92% of the executives that ran these companies in the bubble years are still employed there.  Some of the most egregious offenders are comfortably retired.  Very Comfortably. 

FYI Mr. President.  Anthony Mozilo, former CEO of Countrywide Financial (In 2006 Countrywide financed 20% of all mortgages in the United States) is still working on his tan somewhere warm.  In case you are unfamiliar with this Captain of Responsibility, let me introduce you.
 The 2008 financial crisis is, in inflation-adjusted money, roughly 70 times worse than the Savings and Loan crisis of the late 80's. Per the NY Times however, "several years after the financial crisis, which was caused in large part by reckless lending and excessive risk taking by major financial institutions, no senior executives have been charged or imprisoned, and a collective government effort has not emerged. This stands in stark contrast to the failure of many savings and loan institutions in the late 1980s. In the wake of that debacle, special government task forces referred 1,100 cases to prosecutors, resulting in more than 800 bank officials going to jail."

Anthony Mozilo is the poster boy for Crony Capitalism (formerly known as white collar crime) in America, and his Wikipedia page reads like a blueprint for the greatest heist of our generation.

1. Outrageous Compensation ? Check.

Mozilo's total compensation from 2001-2006 (including salary, bonuses, options and restricted stock) approached $470 million.  That is $214,612 per day, every day,  for 6 years.  Mozilo defended the pay: The compensation was a function of how the company did ahead of the mortgage crisis. 

2.  Crony "Backscratching" campaign with the all the right people to "Grease the Skids"?  Check.

As the housing bubble inflated far beyond rational prices, even highly-paid public officials and corporate insiders were having trouble paying double what a home was worth just a couple of years ago.  No problemo.

"Friends of Angelo (FOA)" VIP program

In June 2008 Conde Nast Portfolio reported that several influential lawmakers and politicians, including Senate Banking Committee Chairman Christopher Dodd, Senate Budget Committee Chairman Kent Conrad, and Fannie Mae former CEO Jim Johnson, received favorable mortgage financing from Countrywide by virtue of being "Friends of Angelo."   The V.I.P.'s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value. For V.I.P.'s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation.Federal employees are prohibited from receiving gifts offered because of their official position, including loans on terms not generally available to the public. Senate rules prohibit members from knowingly receiving gifts worth $100 or more in a calendar year from private entities that, like Countrywide, employ a registered lobbyist.

Speaker of the House Nancy Pelosi's son, Paul Pelosi, Jr., Barbara Boxer, Adam H. Putnam, Richard C. Holbrooke, James E. Clyburn, and Donna Shalala are also among those with mortgages from Countrywide. 

CBS News has obtained the following list of then-Fannie Mae employees  whose names have been turned over to investigators as having received VIP loans from Countrywide: (Fannie Mae and Freddie Mac own or guarantee over half the $11.5 trillion in U.S. outstanding home loan debt and long used their lobbying muscle in Washington to thwart efforts to impose tighter regulation.) Please reference my previous post to see why that is extremely relevant.

• Sandra Adams: Fannie Mae Account Associate
• Nitirwork Armstrong: Fannie Mae Director
• Gregg Ayres: Fannie Mae Customer Acct Manager
• Jeffrey Baker: Fannie Mae Business Analyst
• Ingrid Beckles: Freddie Mac VP Default Mgmt
• Cherry Billings: Fannie Mae Asst to CEO
• Christine Buckley: Fannie Mae Sr Assistant
• Sharon Canavan: Fannie Mae Govt Relations/Lobbyist
• Delynn Conley: Fannie Mae Underwriter
• Carla Corpuz: Fannie Mae Senior Underwriter
• Tanguy De Carbonnieres: Fannie Mae Legal Counsel
• Bernard Deane: Fannie Mae Director
• Mollie Dougherty: Fannie Mae Sr Business Manager
• Roy Downey: Fannie Mae Director
• Cynthia Fatica: Fannie Mae Legal Counsel
• Jamie Gorelick: Fannie Mae Vice Chair
• Lizbeth Grant: Fannie Mae Director Tec/Secondary Mkt
• Greta Hamilton: Fannie Mae Manager/Home Loans
• Lester Handy: Fannie Mae Consultant
• James Johnson: Fannie Mae CEO 1991-98 earned roughly $100 million in pay over his time at the company. 
• Jack King: Fannie Mae Manager
• Karen King: Fannie Mae Credit Risk manager
• Gerald Langbauer: Freddie Mac VP Sales
• Derek Lowe: Fannie Mae Technician/Home Loans
• Mary Lee Moriarity: Fannie Mae Sr Underwriter Consult/Lending
• Daniel Mudd: Fannie Mae Vice Chair and COO  earned $12.2 million in base pay and bonuses while heading Fannie. 
• Paulette Porter: Fannie Mae Sr Proj Mgr/Mtg Securities
• Alan Quirion: Freddie Mac Director
• John Radwanski: Freddie Mac Sr Port Director
• Franklin Raines: Fannie Mae Chairman and CEO earned more than $90 million from 1998 to 2003. Furthermore, the Office of Federal Housing Enterprise Oversight (OFHEO) revealed in 2006 that some Fannie senior executives (including Raines and Johnson) manipulated accounting to bolster their pay from 1998 to 2004. 
• Robin Ramsay: Fannie Mae Customer Acct Manager
• Rebecca Rosena: Fannie Mae Credit Risk manager
• Irwin Rosenstein: Fannie Mae Ass. General Counsel
• Robert Sanborn: Fannie Mae Vice President
• William Shirreffs: Fannie Mae Director
• Joseph Silva: Fannie Mae Servicing Portfolio Manager
• Donna Simpson: Fannie Mae Customer Acct Manager
• Michelle Sorensen: Fannie Mae Sr Business An/Mortgage
• Mary Ann Staley: Fannie Mae Marketing Dir
• Deborah Kay: Tretler Fannie Mae VP Risk Management
• Kirk Willison: Freddie Mac VP Trade Relations/Dir Industry Relations
• David Yoon: Fannie Mae Acct Associate

 3.  Get out of Jail free card resulting from Crony campaign?  Check.

SEC accusation regarding insider sales

Over many years, Mozilo sold hundreds of millions of dollars in stock personally, even while publicly touting the stock and using shareholder funds to buy back stock to support the share price. On June 4, 2009, the U.S. Securities and Exchange Commission charged former CEO Angelo Mozilo with insider trading and securities fraud.

Settlement with SEC

On Friday October 15, 2010, Mozilo reached a settlement with Securities and Exchange Commission.  Mozilo agreed to pay $67.5 million in fines and accepted a lifetime ban from serving as an officer or director of any public company; it is the largest settlement by an individual or executive connected to the 2008 housing collapse.  By settling the SEC charges, Mozilo will avoid a trial that could have provided fodder for future criminal charges.  This fine represents a small fraction of Mozilo's estimated net worth of $600 million. Countrywide will pay $20 million of the $67.5 million penalty because of an indemnification agreement that was part of Mozillo's employment contract. The terms of the settlement allow Mr. Mozilo to avoid acknowledging any wrongdoing.  In February 2011, the U.S. dropped its criminal investigation into the facts behind that civil settlement.

Thus, for a paltry fine of less than 8% of his stolen fortune, Mozilo  eliminates any future lawsuits (while admitting no wrongdoing) and sails off into the sunset.  The perfect crime.  A Heist of over $600 million.

But wait, you say.  He hasn't actually stolen anything.   Sure Countrywide overpaid him and he might have been "overly enthusiastic" in his loan approval policies, but he's not a crook.  I disagree.  Mozilo and those like him have stolen FUTURE VALUE from millions of average Americans.  He stated himself that his compensation was based on how Countrywide did in the boom years.  Handing out loans to anyone with a pulse for years on end artificially and dramatically increased home prices. Those years frontloaded decades worth of potential home appreciation into a 7-year period between 1999-2006, and because the appreciation was based on credit, not on incomes, those home values will inevitably fall back to the 1999 level or below to align with actual income. 

CORELOGIC®

REPORTS NEGATIVE EQUITY INCREASE IN Q4 2011

––Negative Equity Back to Q3 2009 Housing Market Trough Level––

SANTA ANA, Calif., March 1, 2012

––CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today  released  negative  equity data showing that 11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011.   Nationally, the total mortgage debt outstanding on properties in negative equity increased from $2.7 trillion in the third quarter to $2.8 trillion in the fourth quarter.Negative equity, often referred to as “underwater” or  “upside down,”  means that borrowers owe more on their mortgages than their homes are worth.   Nevada had the highest negative equity percentage with 61 percent of all of its mortgaged properties underwater, followed by Arizona (48 percent), Florida (44 percent),  Michigan (35 percent) and Georgia (33 percent).

In a nutshell, you have $2.8 Trillion in underwater mortgages and counting left in the wake of The Great Credit/Housing Bubble Heist.  Place the value of these homes back at their 1998 pre-bubble prices (where they have to be to align with incomes) and you would lose at least 50% of their "value".  A $1.4 Trillion dollar difference.  The banks have long sinced dumped all these bad loans onto the taxpayer by selling them to Fannie Mae and Freddie Mac. The executives that created and profited from this mess kept all the money they made, and 92% of them kept their jobs.  In fact, we're already seeing hisorical revisionism where banks are now the "victims" of unscrupulous borrowers.  Sorry, Warren Buffett, you are wrong on that.  Not one bank executive has been prosecuted, or even charged with anything that they couldn't "settle".  Settlements are just a cost of doing "business" in America these days.  You can settle anything if the price is right.    Just don't be the one caught holding the overpriced house, not getting a bailout, and being "irresponsible".


Freddie Mac bets against homeowners

Obama announces UNLIMITED LOSSES for Fannie and Freddie

How much did previous CEO's make?

Fannie and Freddie CEO's quit, pocket millions

Corelogic data

Obama plans to help "Responsible" homeowners


Zero Prosecutions
Angelo Mozilo