If you aren't depressed enough by the coming collapse of social programs for Californians as the budget nightmare drags on, consider that there will soon be more need for social services and less revenue available, as we segue into the rarely-remarked upon second wave of foreclosures in the Alt-A market.
A new wave of foreclosures is building in Sonoma County, one that echoes the subprime crisis that flooded the region's housing market with distressed properties.
The tide of troubled loans, which first struck high-risk borrowers who did not qualify for conventional mortgages, is now spreading to people with good credit who purchased more expensive homes.
This time, it involves borrowers who took out mortgages known as Alt-A loans. Like the subprime loans that began imploding in 2006, these loans offered seductively low introductory payments that enabled many borrowers to buy or refinance homes that were pricier than they could otherwise afford.
Now, those borrowers increasingly are discovering the true cost of their loans. When the introductory period ends, monthly payments can jump 50 percent or more on the typical Alt-A loan, far higher than many borrowers can afford.
There are hundreds of thousands of these loans in California just waiting to recast. In the context of Sonoma County, 18% of all housing loans are Alt-A, most of them purchased between 2004 and 2006. Two-thirds of them will see rapid jumps in their payments in the next two years.
I spoke with Asm. Ted Lieu this weekend, who didn't even want to describe these as foreclosure waves. "It feels like they never stop." He hopes that the latest government program to try and fix the foreclosure crisis, which can allow new mortgages to be issued at 96.5% of current value, will actually make an impact, but we're talking about a whole new class of borrowers getting into trouble because of these rate recasts. This of course adds to the properties on the market, bringing down prices, adding to a whole new wave of tax reassessments, and on, and on, and on.
You can almost set aside the unemployment crisis, and the feedback loop of decreased government spending leading to reduced consumer spending and more unemployment. Just this continuing housing crisis is enough to permanently disable any solutions to economic recovery.
...I should note that AB260 passed the Assembly today, forward-looking legislation which would prohibit lenders from steering borrowers into bad loans, prohibit lenders from reaping financial advantages (called yield spread premiums) from that steerage, ban negative amortization loans and regulate subprime lending. The Governor vetoed similar legislation last year. This is an impressive reform, but too late. The crisis has spread into prime loans by now.
I think the general consensus on the economy from the grand poohbahs of the establishment is that we're contracting less slowly, that we're easing toward the bottom and will be able to improve as the year goes on. This optimism depends on no further "unforeseen" downturns in key economic sectors. But that just doesn't seem plausible. Zillow.com's estimates show that over 20% of all homeowners owe more on their mortgages than their homes are worth, as prices continue to decline. Considering that 24,000 homes and apartments are vacant in Sacramento, for example, up 40% year over year, the glut of supply suggests that those prices have further to fall. And thus we will not see much of a rebound in equity in the short term. Keep in mind that many of these homeowners who are underwater will experience recasts to their mortgage rates in the coming year, further straining their ability to make payments.
Now we have compelling evidence that a second foreclousre wave is starting to rumble through California once again, which could trigger the very same spiral that brought the nation's economy to its knees last year.
Here's another sign that California's foreclosures could jump in 2009: Delinquencies on dues owed to homeowner associations have risen sharply.
The homeowner association delinquency rate can serve as a leading indicator of sorts because homeowners usually stop paying dues before they stop paying their mortgage. The 90-day delinquency rate on dues for the 260 homeowner associations in California managed by Merit Property Management jumped to 5.3% in March from 2.8% last June. Delinquencies first spiked to 2.6% in December 2007 from 0.8% in March 2007.
The Journal looked at how banks were beginning to ramp up foreclosures after holding off for several months. Pre-foreclosure notices in California spiked in March after a state law had suppressed foreclosures at the beginning of the year.
Pre-foreclosure notices are where this begins, and those notices rose by 80% in the first quarter of 2009 from the previous quarter. As the article notes, the moratorium on foreclosures has been lifted, which will put more pressure on homeowners. We all understand that bad loans caused this crisis in the first place, right? Well, a lot of bad loans are still out there. At particular risk are those mortgages purchased at the height of the bubble in 2005 and 2006. Loans made in 2006 have an 8.5% default rate statewide. These are the worst liar loans, NINJA loans, many of them due to recast to higher interest rates. And this includes jumbo loans.
The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.
If you think this is over, particularly in California, duck.
When the Obama Administration's plan to mitigate foreclosures came out, it was clear that it would be insufficient to deal with the particular challenges faced in California. Initially, the plan would only modify loans where the amount owed was 105% of the home's true value. Given that home prices have collapsed here, this would have helped almost nobody in California. State lawmakers, in particular the Democratic point person on mortgages and foreclosures Asm. Ted Lieu, went to Washington to lobby for changes. And today, faced with a sluggish mortgage rescue program attracting few lenders or homeowners, the Administration expanded the plan.
The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor [...]
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
Loan servicers get a fair bit of cash incentives for participating in the program, which I don't totally support, but if we have to bribe lenders in order to keep people in their homes, that makes more sense than spending the same amount of money on the fallout from a foreclosure. And lenders do take a haircut in the Hope for Homeowners program, the first loss to my knowledge that lenders have been forced to take.
Late last week, Democrats temporarily shelved a bill that would allow bankruptcy judges to modify the terms of mortgages on primary residences (also known as "cram-down"). Moderates who put the hold on this legislation, particularly former Wall Street investor Ellen Tauscher, crowed about it to the media.
This hardly amounts to a breakthrough win for party moderates - or a major concession by the speaker. But it was a consequential moment in the minds of moderate leaders who often find themselves marginalized in a caucus dominated by liberals.
"It shows we have bench strength, and it shows we can flex," said California Rep. Ellen O. Tauscher, who chairs the New Democrat Coalition and played a central role in negotiations over the bankruptcy bill [...]
Moderates worry Pelosi is routinely staking very liberal positions to push House versions of big bills as far to the left as possible to enhance their standing in negotiations with the historically centrist Senate. This might be a smart tactic, but it often hurts Democrats who rely on Republican votes to win reelection. Put bluntly, it makes them look too liberal [...]
That prompted lawmakers, like Tauscher, to limit the scope of the bankruptcy bill as much as possible, even though this measure is only loosely related to the president's broader proposal.
Tauscher's New Democrat Coalition teamed with their natural allies in the Blue Dog Coalition to impose 10 significant changes, including requirements that bankruptcy judges use federal guidelines to determine the fair market value of a home and that modified loans must be "unaffordable and not just underwater" to prevent wealthy homeowners from taking advantage of the process, according to a widely distributed e-mail from Adam Pase, executive director of the New Democrat Coalition.
This, of course, angered some liberals. "The New Dems' position is the banks' position," a senior Democratic aide involved in the bankruptcy negotiations complained on Friday. "New Democrats are shills for the banks."
It's confounding that any New Democrat thinks their constituents give a ring-a-ding about banking industry concerns, and are not in fact the very people struggling to keep their homes that this legislation would help.
More, including Tauscher staffers lying to bloggers, on the flip...
Democratic legislative leaders are in Washington today arguing for increased stimulus money for California. I've been arguing that this is required for some time, and hopefully it will be done in such a way that a) it can be applied to the General Fund deficit (so far Arnold has not asked for budget relief in that way) and b) it can be used without up-front money that will be matched, because the cash crisis limits our ability to do that.
However, there is something else that the Obama Administration can do right away to help the bottom line of the state and its citizens, and that is deal with the crisis in the housing market here. It's no secret that California is one of the hardest-hit states by foreclosures; in Stanislaus County, for example, 9 percent of all houses and condos in the county have been foreclosed upon, a staggering figure. That's almost $4 billion dollars worth of foreclosures in Stanislaus alone. In larger counties like San Bernardino and Riverside, you can see how this foreclosure crisis affects new housing starts (there are a glut of cheaper foreclosed homes on the market) and thusly unemployment figures.
Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California's economic powerhouse, accounting for more than a fifth of the state's new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit's as the highest of any major metropolitan area in the U.S.
Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire [...]
With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit's as the highest of any major metropolitan area in the U.S.?
Nobody is calling on the federal government to prop up a sick housing market that will not see a broad recovery for a while. But foreclosures have a disruptive effect on the greater economy. They hurt property values, they hurt banks, and they hurt employment. The crisis is only slated to grow if nothing is done, with homeowners of every income class affected. And so foreclosure aid would be a major boost to California, and it can be done both quickly and effectively. By pledging that $100 billion from the TARP program will go to limit foreclosures, Obama has already begun this effort. Ted Lieu thinks that the Obama Administration understands the nature of the problem. (over)
(Assemblyman Lieu has been a leader on the foreclosure issue. Welcome him to Calitics. - promoted by David Dayen)
Albert Einstein once said that insanity is doing the same thing over and over again and expecting a different result. Wall Street and Treasury Secretary Henry Paulson have continued to ignore the home foreclosure problem, despite clear and urgent warnings from consumer groups, legislators, and regulators. Virtually none of the $8.5 trillion in federal taxpayer bailout commitments is directed towards helping reduce foreclosures. So it should come as no surprise that new data from the Mortgage Bankers Association shows that foreclosures have increased 76% compared to a year ago to hit yet another record high, with a record 1 in 10 Americans now experiencing mortgage trouble.
The problem is particularly acute in California, which accounts for one-third of the nation's foreclosures. California alone has 54 percent of all foreclosure filings on adjustable rate loans.
• Arnold has hired his chiropractor, his dentist and now his nanny to various state boards. Good thing this guy is nothing like George Bush or we would expect these people to be unqualified!
• The Supreme Court has now stepped into the battle between the Navy and environmentalists, ruling that the Navy can engage in sonar exercises off the California coast that may endanger dolphins, whales and sea lions. Why courts are arbitrating this case instead of the science is one of the neat little quirks of our system. But sure, why should the Navy be inconvenienced by moving a few miles off the coast? Not in the public interest, you see.
• Mountain House, California, particularly Prosperity Street in Mountain House, offers a cautionary tale about how screwed the housing market is:
This town, 59 feet above sea level, is the most underwater community in America.
This week, a real estate office in Tracy, Calif., near Mountain House, was advertising foreclosure sales.
Because of plunging home values, almost 90 percent of homeowners here owe more on their mortgages than their houses are worth, according to figures released Monday. That is the highest percentage in the country. The average homeowner in Mountain House is "underwater," as it is known, by $122,000.
That is really worse than anyone's projections. This is going to be a brutal downturn, and the recently upgraded homeowner relief looks to be insufficient.
• DiFi, who may be made chair of the Senate Intelligence Committee, is striking hard at the most important, festering problem at the soul of our society today - scalped tickets for the inauguration. But I'm sure that if we were committing torture or illegally wiretapping on Americans or indefinitely detaining prisoners without charges, she'd be all over that, too.
• Gary Miller has been caught with some pretty shady campaign practices again. Well, I take that back, this goes beyond shady:
apparently Congressman Miller paid his "bigger development construction company" a series of 5 payments which equaled $47,360. All this came from his re-election campaign, and when this is taken into perspective, it amounts to his largest campaign expenditure, 22% of the $218,368 that he raised.(LiberalOC)
• Dan Weintraub, hero of High Broderism. I love this line: "Will (redistricting) change the world? No." The better question is "Will it change anything?" I love how these guys never look at the actual registration statistics, with all these seats that have changed between 6-8% in party affiliation, when they intone that legislators pick their voters. Do they pick who changes their registration, who dies and who moves, too?
• Finally, CREDO Mobile is trying to whip legislators to remove John Dingell from the chair of the House Energy Committee and replace him with Henry Waxman. Which is great, and they personalize the message so that each person receiving their email gets the name of their Congressman on it. Only, my Congressman is Henry Waxman. And so my message said "Will you tell Henry Waxman to vote for Henry Waxman for Energy Committee chair?"
Over the weekend, Assembly Democrats were very firm in their desire to see significant mortgage reform as part of any special session in the Legislature in November. This is a crisis for the state that has a large impact on the greater economy. At a recent speech I attended, Bill Clinton estimated that each foreclosure costs the economy $250,000 in lowered property values, maintenance and opportunity costs. So demanding real mortgage reform is keenly sought. The Assembly has been screaming for this since September 2007, and the unholy alliance between the governor and mortgage banking interests has squashed any real reform. And in the meantime, foreclosures have skyrocketed in the state. One in three homes experiencing foreclosure in August was in California, affecting over 101,000 homes (or one every thirty seconds). The news got better in September, but only because of the one meager law that the governor allowed to get through, which included a 30-day waiting period where banks must contact the borrower in question before introducing foreclosure filings. That's a stopgap measure, and if nothing further is done, October and November will show a spike.
We understand you are considering calling a special session to address the state budget. Four billion dollars of last year's budget deficit is attributable to the foreclosure crisis and billions more will be lost this year if nothing is done to address the crisis. The special session would be an appropriate time to address California's mortgage system.
Stabilizing the mortgage mess doesn't just make economic sense, it's a moral imperative. Unless you want Arnoldville tent cities popping up throughout the state, something must be done and as soon as possible. And while this is best determined at the federal level, we have the ability to go to great lengths to fix this, as other states like North Carolina and New York have done.
Arnold vetoed AB 1830 and consigned homeowners to a pretty cruel fate. He needs to be pinned with that failure and pressured to change course. I'm glad that Democrats in the Assembly are making it a priority.
This past week, Naomi Klein bravely stepped into the lion's den this week and addressed the University of Chicago, protesting their bid to name an economic research center after Milton Friedman. It was a bravura speech where she made the argument that the current financial crisis is the final repudiation of Friedman's twisted theories of unregulated capitalism.
More than that, what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed, because what we have been living, since Reagan, is a policy of liberating the forces of greed to discard the idea of the government as regulator, of protecting citizens and consumers from the detrimental impact of greed, ideas that, of course, gained great currency after the market crash of 1929, but that really what we have been living is a liberation movement, indeed the most successful liberation movement of our time, which is the movement by capital to liberate itself from all constraints on its accumulation.
So, as we say that this ideology is failing, I beg to differ. I actually believe it has been enormously successful, enormously successful, just not on the terms that we learn about in University of Chicago textbooks, that I don't think the project actually has been the development of the world and the elimination of poverty. I think this has been a class war waged by the rich against the poor, and I think that they won. And I think the poor are fighting back. This should be an indictment of an ideology. Ideas have consequences.
Now, people are enormously loyal to Milton Friedman, for a variety of reasons and from a variety of sectors. You know, in my cynical moments, I say Milton Friedman had a knack for thinking profitable thoughts. He did. His thoughts were enormously profitable. And he was rewarded. His work was rewarded. I don't mean personally greedy. I mean that his work was supported at the university, at think tanks, in the production of a ten-part documentary series called Freedom to Choose, sponsored by FedEx and Pepsi; that the corporate world has been good to Milton Friedman, because his ideas were good for them.
But he also was clearly a tremendously inspiring teacher, and he had a gift, like all great teachers do, to help his students fall in love with the material. But he also had a gift that many ideologues have, many staunch ideologues have-and I would even use the word "fundamentalists" have-which is the ability to help people fall in love with a perfect imagined system, a system that seems perfect, utopian, in the classroom, in the basement workshop, when all the numbers work out. And he was, of course, a brilliant mathematician, which made that all the more seductive, which made those models all the more seductive, this perfect, elegant, all-encompassing system, the dream of the perfect utopian market.
Klein mentions the Free To Choose series, and later on she highlights something I forgot - the man who introduced one of those series on PBS:
"Being free to choose means being free to make your own decisions. Free to live your own life, pursue your own goals, chase your own rainbow without the government breathing down your neck or standing on your shoes. For me it meant coming to America, because I came from a socialistic country where the government controls the economy."
That was Arnold Schwarzenegger in 1990, spouting free market fundamentalism in a corporate-sponsored documentary which mainstreamed ideas that today have brought us to the brink of economic failure. It's important to know what altar at which Schwarzenegger worships. It's important to know how he was, for a long time, the glitzy front man for Friedmanism, the showy snake oil salesman that got Joe Six-Pack to think that corporate behemoths eliminating rules for themselves was in the best interests of the common man. If Friedman was P.T. Barnum, then Arnold was the star attraction in the center ring of the circus. And he clearly believes, or at least is willing to front, that these ideas, about "free enterprise and free people," are immutable, hard science, incapable of being wrong.
Except we are now at a moment when, as governor, Schwarzenegger is bearing the brunt of the worst effects of unbridled capitalism. His state is caught up in the credit market freeze, with no money to pay the bills. He is begging the state's citizens to buy bonds and bail the government out, an approach taken so clumsily that he got Wall Street shaken at the precise time when he has to go into the market to borrow money. The state's public infrastructure is crumbling on his watch and even that won't be enough to make up the revenue shortfall.
A lot of people would let Schwarzenegger off the hook for this. The national economy went bad, and the financial markets failed as a result of the housing bubble bursting, and surely the governor of California can't be held responsible for that. Except he is such a devotee of Friedmanism, and in fact one of its key pitchmen, that of course he is guilty. Guilty of the same faith in capitalists not to be driven by greed. Guilty of stripping regulation and empowering corporate America to live in a tax-free and restraint-free bubble. And as the current cesspool of deregulation, where market forces run wild and greed becomes virtue, gets a reckoning due to the carnage it has caused, so too must the man who introduced Free To Choose all those years ago. He was wrong then, and he's doubly wrong now. To quote Naomi Klein:
Ideas have consequences. And when you leave the safety of academia and start actually issuing policy prescriptions, which was Milton Friedman's other life-he wasn't just an academic. He was a popular writer. He met with world leaders around the world-China, Chile, everywhere, the United States. His memoirs are a "who's who." So, when you leave that safety and you start issuing policy prescriptions, when you start advising heads of state, you no longer have the luxury of only being judged on how you think your ideas will affect the world. You begin having to contend with how they actually affect the world, even when that reality contradicts all of your utopian theories. So, to quote Friedman's great intellectual nemesis, John Kenneth Galbraith, "Milton Friedman's misfortune is that his policies have been tried."
It's the ideological blinders that caused this crisis that must be taken off if we're ever going to get out. Schwarzenegger is somehow seen as the "good cop" Republican in the mix of California, wanting ever so to do the right thing. But the one area of jurisdiction, the one part of this crisis where the California governor could have had a hand in stopping the bleeding, when he could have imposed regulations to help stop predatory lending and rein in the runaway mortgage market in one of the biggest bubble states in the country, Arnold not only decided to do nothing then, but has continued to do so. Laissez-faire remains his core philosophy, the failed philosophy of conservative economics.
I guess the banks and the lenders need to be free to choose.
It would be irresponsible for state Democrats not to remind the public that the pain and anxiety they are seeing today is a cause of the insane embrace of Friedmanism, and that the man at least in large part responsible is the muscle-bound Governator who was willing to put a smiley face on the shock doctrine.
Yesterday, Bank of America announced that they would settle their lawsuit with a parade of states Attorneys General that began before BofA bought out the defendant, Countrywide Financial. The initial suit alleged that Countrywide engaged "in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market." At the time I thought it would be difficult to hold Countrywide responsible for what the mortgage market is intended to do, but I suppose they didn't want to face a jury at a time when the financial industry is melting down.
This settlement, which could provide up to $8.68 billion dollars for as many as 400,000 homeowners nationwide (and up to $3.5 billion in California), has some very laudable parts to it:
Under the terms of the settlement, eligible subprime and pay-option mortgage borrowers with loans from Countrywide will be able to avoid foreclosure by obtaining modified and affordable loans. Here is the information released by Brown's office:
The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America's foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:
• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;
• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;
• Waiver of late fees of up to $33.6 million;
• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;
• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and
• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.
This is exactly what should have been in the bailout bill - a large-scale workout for homeowners on the brink of foreclosure to modify their loans and stay in their homes. It's arguably costlier to the bank at this point for the mortgages to go completely bust and to deal with the foreclosure. In addition, BofA is SUSPENDING subprime loans and negative amortization loans as well as loans with little or no documentation from the borrower, which is in a way more significant because that's at the root of the financial crisis.
These are also the kind of steps that Ted Lieu sought in his AB 1830 which was vetoed by the Governor - banning predatory lending and unsustainable mortgage loans. Ultimately, Attorney General Brown was forced to seek remedy in the courts because the regulatory structure had broken down and the Congress was unable or, more likely, unwilling to give struggling homeowners a hand.
This shouldn't be Jerry Brown's job, but the systemic failure fell to him, and he performed brilliantly. And he's not done:
And this is not the end of this chapter. The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute separately his case against Mozilo and Sambol.
Lawmakers like Dianne Feinstein and others should be a little ashamed that they were able to do so little in the wake of this crisis while Jerry Brown did so much more.
That's the only explanation I have for him vetoing AB1830:
Gov. Arnold Schwarzenegger vetoed a proposal today that would have imposed tougher restrictions on mortgage brokers, such as banning them from issuing exotic loans to subprime borrowers that cause balances to grow rather than shrink over time [...]
The bill by Assemblyman Ted Lieu, D-Torrance, would have banned subprime borrowers from obtaining "negative amortization" loans, agreements that offer low initial payments but increase the principal balance over time, boosting interest costs and making them difficult to pay off.
AB 1830 also would have specified that mortgage brokers owe a "fiduciary duty" to borrowers. It would have prohibited brokers from steering borrowers toward higher risk loans than they would qualify for based on their income and credit. And it would have capped prepayment penalties for borrowers who want to refinance their loans to seek better terms.
Schwarzenegger, in his veto message, said the bill had laudable goals but that it "overreaches and may have unintended consequences."
Overreaches into the profits of his mortgage lending industry buddies, that is. Schwarzenegger's concerns about putting state mortgage brokers at a "competitive disadvantage" compared to their unregulated federal counterparts is easily managed (like forcing anyone who does business in the state to work under one standard) and just a pathetic excuse.
We are in crisis mode on Wall Street right now because mortgage lenders, pressured by investment banks and securities markets, abused the process and came up with all sorts of exotic schemes to get borrowers into homes. This bill would have curbed the worst practices of the industry. The Governor would rather they continue. He would rather mortgage lenders rip off their customers. He would rather the economy sink into a deep recession.
One unexamined aspect of the Governor's character is how much of a mindless puppet he is for Chamber of Commerce interests. Let this be another example.
The big story today continues to be the Bush/Paulson bailout bill, which is now being debated on Capitol Hill. In calling my representatives yesterday, Rep. Waxman seemed very wary of giving away $700 billion dollars to the Treasury Dept. without oversight or judicial review. Sen. Boxer's statement still buys into the "need for speed" that is accelerating this legislation in an effort to sneak through something very bad, but she does hit the real genesis of the crisis.
In addition, we must get to the root of the housing crisis and work to keep people in their homes through refinancing; if we don't, housing prices will continue to freefall and we will still be in a mess.
In California, we have more foreclosures than any other state-in August more than 101,000 Californians received foreclosure notices and more than 33,000 lost their homes.
If the American taxpayers come to the rescue in this financial crisis, you have to provide assurances that they aren't just taking on bad debt and further jeopardizing their future.
The housing crisis is the first mover here. Lenders and financial industry actors had an extreme need to get people into mortgages, no matter their income or ability to pay, and they sweet-talked them into teaser rates and ARMs with no money down and low opening monthly payments. The idea was to accumulate as many mortgages as possible to package them into mortgage-backed securities to sell overseas. It was a bad bet predicated on perpetual growth in the housing market, and when it crashed there was no flight to safety.
The most important protection for taxpayers comes with protection from the types of lending schemes we saw in the housing market, and that starts not just on Wall Street, but in the states. Aggressive regulation of the housing market in California will go very far to protect against such a crisis from happening again. The legislature passed AB1830 to address exactly this issue, and today Asm. Ted Lieu, the author of the bill, writes Governor Schwarzenegger urging him to sign it.
As you have said in advocating for budget reform, "Enough is enough!" Similarly, the past few years have shown the consequences of a system that failed to effectively regulate and reign in the out of control subprime mortgage industry. The laissez-faire policies previously advocated by much of the industry have turned out to be disastrous. As with budget reform, we need effective mortgage reforne. "Enough is enough!"
To much of the industry's credit, many within the industry and Wall Street recognize that they need better regulation. That is why the following major industry institutions (collectively representing thousands of financial institutions) have all gone neutral on this bill and many of them have contacted your office asking you to sign this bill: The California Bankers Association, California Mortgage Bankers Association, California Independent Bankers, California Credit Union League, and the California Financial Services Association [...]
AB 1830 provides consumer protections for subprime loans while maintaining access to credit and homeownership. This carefully crafted bill is the product of dozens and dozens of meetings and discussions with industry and consumer groups over an eight month period. Through our efforts to craft a balanced approach the leading organizations in the financial and banking industry have gone neutral on this bill. Although a minority of groups still oppose, such as the mortgage brokers and realtors, we have taken several of their suggestions and have worked hard to try to accommodate their concerns.
AB1830 would put mortgage brokers themselves on the hook for their predatory practices, imparting to them a fiduciary duty which would subject them to potential civil suits and loss of license were they not to put the economic interest of the borrower first. It would end the practice of yield spread premiums, which actually financially incentivized brokers to put borrowers into riskier and more costly mortgage options. It would prohibit steering prime borrowers into subprime loans, a common practice. It would ban "negative amortization" loans that would cost the borrower more for the loan even after their initial payments. It would increase enforcements, put caps on prepayment penalties, and go very far to prevent the kinds of abuses that led to this crisis in the credit markets.
It's essential to the future of your stock portfolio as well as the future of the state's economic picture to pass AB1830. The Governor should do so as soon as possible.
First Rep. Laura Richardson was having problems making house payments, defaulting six times over eight years.
Then after a bank foreclosed on her Sacramento house and sold it at auction in May, the Long Beach Democrat made such a stink that Washington Mutual, in an unusual move, grabbed it back and returned it to her.
This week, in the latest chapter in the housing saga, the Code Enforcement Department in Sacramento declared her home a "public nuisance."
The city has threatened to fine her as much as $5,000 a month if she doesn't fix it up.
Neighbors in the upper-middle-class neighborhood complain that the sprinklers are never turned on and the grass and plants are dead or dying. The gate is broken, and windows are covered with brown paper.
"I would call it an eyesore," said Peter Thomsen, a retired bank executive who lives nearby.
I think "embarrassing" is the best word for it. Laura Richardson has no need or use for a home in Sacramento anymore, and in her letter to supporters trying to give an alibi for her recent conduct, she says that she isn't rich and doesn't have a second income to afford her lifestyle. Then why the useless home in Sac'to that's become decrepit?
If this was the only thing wrong with Richardson, it'd be enough, frankly. But the fact that she voted to sink the Fourth Amendment and provide amnesty for lawbreaking to the telecoms in the FISA bill means that her votes are as embarrassing as her home upkeep. It's really unacceptable to have her as a representative of this state, honestly.
A few things of interest as we head into the holiday weekend:
• That mortgage legislation that I noted passing the Assembly yesterday was quickly taken up in the Senate (there were some amendments in the Assembly bill so concurrence was needed, and it passed easily (the vote was 32-8). The legislation will now be sent to the Governor and there are indications that he will sign it. Because of the 2/3 vote it received, most of its provisions will take effect immediately. It's a decent first step but it had better not be the last.
• The new Cook Report ratings are out, and among the slew of seats where Democrats are gaining, one race in California has shifted:
CA-46 Dana Rohrabacher Solid Republican to Likely Republican
That's pretty big news. Charlie Cook's report is widely read by insiders, and clearly they are taking notice as to the strength of Debbie Cook's campaign. Joe Shaw, communications director for Cook's campaign, calls it "the first Orange County congressional race to be considered competitive since Congresswoman Loretta Sanchez's 1996 race against incumbent Bob Dornan."
• In CA-04, Charlie Brown announced a whirlwind schedule for the 4th of July, participating in events in King's Beach, Lincoln, Roseville, Grass Valley, Auburn, and Alturas. Tom McClintock must have seen that and scrambled up on the plane from his Thousand Oaks redoubt, because he hastily scheduled a couple campaign events. In fact, the two candidates will be in the same parade in Lincoln. That should be fun.
Yesterday, the Assembly passed SB 1137, which would alter the mortgage industry in California and aid those in danger of losing their homes. It got through the Assembly by one vote, with 10 Republicans voting with the Democrats. The Senate will need to pass it again to conform to some amendments and then this will go quickly to the Governor's desk. As Frank Russo writes:
The bill that passed, SB 1137 is authored by Democratic Senators Don Perata, Ellen Corbett, and Michael Machado, and coauthored by Speaker of the Assembly Karen Bass and principal coauthor Assemblymember Ted Lieu, who presented it on the Assembly floor. It goes beyond federal laws and received broad support from consumer groups. The legislation requires lenders and servicers to: 1) contact borrowers (or engage in a prescribed process to do so) to schedule telephone or in-person meetings on restructuring options before beginning the foreclosure process, 2) requires a 60-day notice to be given to tenants of buildings facing foreclosure before they can be removed from a rental housing unit; and 3) allows fines of up to $1,000 a day for owners of foreclosed properties that fail to adequately maintain them.
I like aspects of this legislation, particularly the steps toward removing blight in homes that aren't properly maintained, which is a big problem in heavily foreclosed areas. But this bill is a watered-down supplement to the raft of bills presented by Ted Lieu earlier this year, which would have really reformed the mortgage market. There would have been enhanced regulation, limits to penalties for prepayment, a requirement to translate loan terms to non-English speaking customers (yes, that's not current law), eliminate yield spread premiums (which rewarded lenders for getting their customers into higher interest-rate loans) and gotten rid of weasel language in mortgage documents like involuntary legal waivers. Almost all of those bills were gutted to the delight of the lending industry. What's in its place is vaguely helpful to borrowers, but not at all the industrywide reform that is needed to ensure that a runaway market like we saw a few years ago will never be repeated. Lieu modeled his reforms after those in North Carolina, where they work very well. This was a case of the lobbyists getting a hold of legislation before it could actually do any good.
California Attorney General Edmund G. Brown Jr. today sued Countrywide Financial, its chief executive Angelo Mozilo, and president David Sambol, for engaging in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.
"Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market," Attorney General Brown said. "The company sold ever-increasing numbers of complex and risky home loans, as quickly as possible. Countrywide was, in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers. Today's lawsuit seeks relief for Californians who were ripped off by Countrywide's deceptive scheme."
It is certainly true that lenders like Countrywide had to feed the beast of mortgage-backed securities, which investors were gobbling up at the height of the housing boom. They absolutely valued getting a mortgage into the secondary market over securing a mortgage that the buyer could actually pay back. The question is the level of criminality here. Atrios, an economist who's been following "Big Shitpile" for quite a while, isn't fully convinced:
We do know that at some point the product that mortgage companies were selling essentially flipped. They went from providing mortgages to people, to providing bundled mortgage securities to Wall Street. While it's quite possible that there was actual fraud going on with respect to mortgage borrowers, the greater fraud might have been perpetrated against the investors which eagerly bought up their chunks of big shitpile. Obviously I sympathize less with the latter who are paid big money to, you know, have some idea what they're doing.
Tanta at Calculated Risk is similarly unimpressed with a similar lawsuit out of Illinois, saying that it it trying to sue over established industry practice.
Volume-based compensation structures? There have been volume-based compensation structures in this business since long before Tanta got into it. Does it create perverse incentives? Sure. Do we have to like it? No. Has it operated all these years in plain sight of regulators, investors, and the public? Yes. Is CFC's pay structure all that different from anyone else's? I profoundly doubt it.
And if anyone who has ever underwritten a loan in 30 minutes has to go to jail, the jails will be full indeed. I wonder if they'll let me take my new Kindle. Jesus H. Christ on a Process Re-engineering Consultant Binge, folks, anybody who didn't tell the analysts on the conference calls that they'd got their average underwriting time down to 30 minutes was Nobody back in 2000. Not to mention the AUS side of the business where underwriting had gotten down to 30 seconds.
The problem with Countrywide valuing volume over quality is that they appear not to have to pay the price for that. In a traditional system, Countrywide getting stuck with a lot of bad loans would hurt them, creating a disincentive. Now, they're passing on that pain to investors, and the feds are swooping in to bail the financial institutions out anyway, so it's guilt-free. I don't know that the remedy here is a lawsuit, other than allowing the market to punish bad actors, something we never do in this country, because for decades we have socialized risk and privatized profits.
California is starting to look more and more like the factory states in the 1980s after everybody pulled out.
California's deteriorating economy is demonstrated anew by a sharp jump in the state's unemployment rate to 6.8 percent in May.
The Department of Employment says 60,000 fewer Californians held jobs last month than in April, and 18,000 fewer than in May 2007. Unemployment, meanwhile, hit 1.3 million, up by 300,000 from May 2007.
That's an over 30% increase in the unemployed in just one year.
The paralysis of the state's government is slightly more manageable when job growth is expanding, sectors are booming and money is flowing into the coffers. When you have a dramatic downturn like this, government simply must have the flexibility to act. It actually needs that flexibility all the time, but in a downturn people suffer visibly from the structural stasis.
If the Democrats can use the Youngstown-ization of the state economy as a lever to argue for legitimate, long-lasting structural changes, they'd gather a lot of support. The LA Chamber of Commerce is talking about restoring the car tax, fercryinoutloud. The problem, of course, is that California's government is being held for ransom, in a bipartisan way, and it simply eliminates any opportunity for moving forward.
The backers of a package of bills to overhaul subprime lending regulations pointed to a deepening crisis that has put one of every 242 California homes into foreclosure in February, the second highest rate in the nation [...]
The package of subprime bills had been approved by the Assembly. But it hit rough waters Wednesday in the Senate banking committee, chaired by Sen. Mike Machado, D-Linden.
Machado has dealt with mortgage issues for years. His district is one of the national epicenters for foreclosures. But Machado is seen by some consumer advocates as overly sympathetic to the industry.
"The arguments he makes are certainly quite similar to those made by the industry folks we are negotiating with, and in many cases don't seem to put the protection of consumers at the forefront," Leonard said.
Machado isn't alone in being bought and paid for, of course. The lobbyists talk about "regulatory nightmares" that will stop anyone from getting credit and stunt job growth. They spend lots of money to ensure their argument will be heard. And they water everything down.
This is why we have a bitter, angry electorate. Democrats have the opportunity to channel that anger. But the universe of those who put their constituents first is narrow indeed. Broken government leads to broken lives.
Welcome to Youngstown.
(alternatively, you could call it Bankruptsville, USA. But I like Youngstown.)
This article by Frank Russo got me pretty depressed about the state of California politics.
There's something amiss in the state of Sacramento-and it has something to do with the state's banking and lending institutions and the stacking of committees that deal with them with legislators that are either weak kneed or just a bit overfriendly with the industry that they should be protecting us from.
What else is new?
Well, this afternoon, the Senate Committee on Banking, Finance, and Insurance, Chaired by Senator Michael Machado of Stockton, will be hearing two bills that have been gutted down behind a closed door process such that today's public proceedings on them may amount to little more than a sham [...]
It's difficult enough to get bills passed through the Assembly Banking Committee and the Assembly floor when going up against the behemoth banking industry which has a lot of spare change to throw around in legislative races and many high paid lobbyists scurrying about the Capitol.
It looks like AB 69 by Assemblymember Ted Lieu, originally a great bill, has been amended since it left the Assembly-and before today's hearing-such that the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices, initially listed in support, has withdrawn that position.
Read the whole thing. The bottom line is that in this recent primary election special interest groups spent nearly $10 million, and a good bulk of them were business interests who are now playing inside Democratic primaries in traditionally liberal areas to sell low-information voters a bill of goods. This doesn't always work, but it works just enough to frustrate progress in Sacramento.
Lesson 3: The business lobby can influence Democratic politics, even in a largely minority district.
Former Assemblyman Rod Wright, a moderate, defeated liberal Assemblyman Mervyn Dymally -- reversing the pattern of leftist victories -- in a South Los Angeles Senate district after business donors invested roughly $1 million in Wright's campaign.
"Business has tended to stay out of black politics," says Sragow, who advises the business lobby. "But some black politicians ask, 'Why? We're always out looking for economic development in our districts.'
"The business community has decided it can't get a Republican Legislature, so it will play in districts where there's a Democratic candidate it can work with."
A major Democratic strategist has all but said that Don Perata shepherded along the candidacy of Rod Wright, and actually put it in terms that come very close to illegal coordination (note "a flurry of record spending by closely-aligned IE groups focusing all of their attention and ammo in one, concerted direction.")
This is the game. IE's are increasingly the only way to reach the electorate, as the low-dollar revolution has pretty much not reached the Golden State. So the Chamber of Commerce and industry groups fill the pockets of the politicians who, once elected, feel obligated to repay them. The US Constitution allows the right for anyone to petition their government for redress of grievances; outlawing lobbyists or the ability of merchants to consult their politicians is not tenable. What is tenable is to either create a parallel public financing system by employing the residents of the state to pay attention to local politics enough to fund progressive-minded candidates, or to bring clean money to California, where it's arguably needed more than anywhere else, and end the pernicious influence of special interests in state elections. Otherwise, you get a steady parade of mortgage relief bills that offer no relief.
• Obviously everyone is going to be working hard for their causes and candidates, so it may be a little quiet around here. I'll be out walking all day tomorrow. Oh, and don't vote for the racist guy, Bill Johnson, as a Judge of the Superior Court (Office number 125) in LA County.
• Yesterday was the deadline for bills to get passed out of their chamber of origin, and the Assembly passed major subprime mortgage legislation, without help from Republicans (6 of them abstained despite being seated right in the chamber). This bill has some good homeowner assistance elements that will allow people to restructure their financing before foreclosure. A mortgage bill has also passed the State Senate, so some form of legislation will hopefully get to the governor post haste.
• One of the biggest problems with the housing crisis is that, as home sale prices lower, homeowners are reassessing their value and getting their property tax lowered, decreasing state revenue yet more.
• Sticking in the shiv before riding off into the sunset, Fabian Nuñez writes a puzzling op-ed in the Sacramento Bee approving of the Governor's horrible idea to borrow against future lottery revenue. Considering that the only sustainable solution to the permanent crisis mode that we have in our budget is to reorganize the tax structure instead of constantly borrowing, I have no idea why any Democrat would veer so far off message and undermine the new Speaker's ability to move forward. What's more, lotteries are regressive taxes on the poor.
• One spot where there will be a lot of action on Tuesday is in Ventura County, where Democrats now outnumber Republicans and which could have contested elections in the Assembly, Senate and US Congress. However, the LA Times shows its political acumen by writing:
One of the more closely watched contests on Tuesday will be the Democratic primary in the 24th Congressional District. Insurance agent Mary Pallant of Oak Park; Marta Jorgensen, a Solvang educator; and Oxnard businesswoman Jill Martinez are running.
Marta Jorgensen quit the race over a month ago and endorsed Martinez. Way to go, LAT.
• Excellent news out of Los Angeles: there's been a $1 million dollar settlement with Hollywood Presbyterian Medical Center for their dumping homeless patients on Skid Row. They will also be monitored by a US Attorney for five years. This unethical practice has reached a reasonable conclusion. Hollywood Presbyterian deserved punishment.
• Trying to get rid of marijuana grow houses in Arcata is like trying to get rid of the Pacific Ocean on the California coast.
This Laura Richardson (CA-37) loan default story is growing. The Hill is reporting that she's had three homes in default and is currently renegotiating with her lender to save one of them. It seems like she's engaging in what amounts to a pyramid scheme - buying new homes with little money down, and at the same time loaning her campaigns for state Assembly and Congress tens of thousands of dollars. So the money that would be used to pay off the loan is paying for her political upward mobility.
A third home that Richardson borrowed heavily to move into in Sacramento was sold at auction earlier this month -- at a $150,000 loss to the bank that issued her the $535,000 loan. ...
Even as that was happening, ethics watchdogs were crying foul over Richardson's personal finances and questioning how she was able to lend her campaign to Congress $77,500 in the midst of multiple home loan defaults. ...
Federal Election Commission (FEC) reports show that Richardson loaned her campaign a total of $77,500 -- in three installments -- between June and July of 2007.
Richardson's year-end FEC filing showed that her campaign still had $331,000 worth of debt but $116,000 cash-on-hand. ...
Meredith McGehee, policy director for the Campaign Legal Center, said it would be reasonable for the FEC to look into the timing of the loan against the timeline of Richardson's home loan defaults.
"In situations like this it's very important for whoever loaned her the money to demonstrate that they treated her equitably, not favorably," McGehee said. "Otherwise, you're getting into a situation of a corporate underwriting of a campaign."
It was pretty clear last year, when Richardson ran a divisive, racially-toned campaign to win the Congressional seat against State Senator Jenny Oropeza, based in part on saying how this was "our" seat (referring to African-Americans), that she was potentially bad news. This confirms it. I won't defend her because these types of financial improprieties are unaceeptable. Getting behind on one loan because it's a fact of life that you need to practically go broke to win a political campaign is one thing. But this to me looks like a series of efforts to possibly use borrowed money and plow it into political activities. And that's wrong. I don't think she's in danger of losing her primary next week, but she should be.
