Fragments and Segments

** Some of those adjustable rate mortgages sold to homeowners in what are now Foreclosure Frontrunners (like Las Vegas, NV) were based on the nefarious mix of indexes and margins.  Bankrate.com explains: “When you get an ARM, two main factors determine the rate you pay: the index and the margin. The index is a rate set by market forces and published by a neutral third party. The margin is an agreed-upon number of percentage points that is added to the index to determine your rate.”  One of the most popular spot rate indexes? LIBOR.  (London Interbank Offered Rate)  Just when we might have thought we’d plumbed the depths of the mortgage meltdown muck… Behold! The Department of Justice began investigating LIBOR  as part of  a “criminal probe into whether the world’s biggest banks manipulated a global benchmark rate that is at the heart of a wide range of loans and derivatives, from trillions of dollars of mortgages and bonds to interest rate swaps …” [HuffPo] But wait! There’s more.

There were flaws in banks’ internal controls that allowed traders to manipulate interest rates around the world [Bloomberg] and now after 26 years of association with LIBOR the British Bankers Assn. is trying to put some distance between itself and its creation:

“The British Bankers’ Association, the century-old lobby group that oversees the rate, last week deleted references from its website referring to its role in setting Libor. This week, it met regulators and bank executives to review the future of the benchmark. Under one option, the Bank of England’s proposed Prudential Regulation Authority would take responsibility for policing the rate, said a person with knowledge of the talks who asked to remain anonymous because discussions are private. The BBA says it isn’t seeking to cede oversight to the regulator.” [BusinessWeek]

What’s all the fuss about?  It’s a minor little technical flap? No, because the LIBOR rate underpins about $360 TRILLION — yes, that’s Trillion with a T — in securities globally.  If you want to see what $1 trillion looks like click here, now imagine $360 Trillion.   Continuing the day’s rant — could someone please stop the Financialists from decimating Capitalism, pretty please?

** Must read for the morning: J.P. Coolican’s article in the Las Vegas Sun about the inadequacies of Nevada’s mental health care services. “In Clark County, we have 733 beds, but 127 are set aside for the elderly and 58 for children. We have 298 beds at Rawson-Neal Psychiatric Hospital, but the Legislature only budgeted staff to support 190.”  Any questions?

** The Miami Herald reports that there are brochures being distributed in the Florida Senate demanding that the state legislature ban Sharia law.  Just asking, but didn’t we just get a barrage of poutrage about a requirement that health insurance corporations provide coverage for contraceptive prescriptions which was characterized as “an assault on religious freedom?”  If the assault on Islamic religious law is not an assault on religious freedom, it’s hard to calculate what it would be.  Has anyone amongst the fundie crowd not yet picked up on the fact that if Sharia is vulnerable, then so is the Jewish Halachah? [JTA]  The freedom of religion is not a license to force everyone else to follow one religion’s precepts.

** Speaking of the Catholic vote, it’s not going to über-Catholic Rick Santorum. ” Santorum’s voting base is white evangelical Protestants, a category that happens to overlap significantly with three other demographics where he does well: “very conservative” voters, Tea Party supporters, and voters from rural and exurban areas.” [WashMonthly]

** Those vote suppression identification laws like the ones passed by Tennessee and Ohio appear to be working, if by “working” it means they are preventing people from voting — like the former Tennessee Congressman who was mysteriously removed from voting rolls and was not offered a provisional ballot, and an 86 year old Ohio World War II veteran who couldn’t cast his ballot because a poll worker rejected his VA identification card. [TP]

** Good headline from The Grio, “Limbaugh’s Downfall is no Fluke.”  Another headline looming as Limbaugh continues to bash the Chevy Volt, America’s answer to the Prius?  Really, Mr. Limbaugh, do you WANT American manufacturers to fail?  [TPM] Best Presidential smack down of a ridiculous question from a Faux news flack, click here.  (Video, but with partial transcript thoughtfully provided for those whose hearing isn’t so hot.)

** “Too small to be a republic and too large to be an insane asylum” (James L. Petigru): South Carolina’s Laurens County Republican Party has a pledge for office seekers to sign — “Your spouse cannot be a person of the same gender, and you are not allowed to favor any government action that would allow for civil unions of people of the same sex.” [HRC] There’s more: “You must favor, and live up to, abstinence before marriage.  You must be faithful to your spouse. Your spouse cannot be a person of the same gender, and you are not allowed to favor any government action that would allow for civil unions of people of the same sex. You cannot now, from the moment you sign this pledge, look at pornography.” [CChron]

She Didn’t Start The Fire: Mortgages, Obligations, and the Fall Out

With apologies to Billy Joel for appropriating the song title, but there are people much like the lady in Spanish Springs, NV who are victims of the avarice of Wall Street bankers, and who definitely don’t fall into the convenient category of “irresponsible borrowers.”

“Restructuring her mortgage sounded like a good idea at the time, but it soon dawned on Jacober that she wouldn’t be able to afford her payments once her ARM reset. The fact that the mortgage was an interest-only loan made matters worse, since she wasn’t making payments on the principal.  Jacober decided to be proactive, and contacted her bank ahead of time. But she was told they couldn’t help her unless she was three months late on her payments. Once Jacober was three months late, however, her dream home turned into a nightmarish situation.”  [RGJ]

We can parse this situation and see in the pieces how the secondary credit market as played during the Housing Bubble fit into the timeline of the Wall Street induced meltdown.

The Sale

All manner of people in this country restructured mortgages during the Bubble, some to address life change issues — such as the lady in our example, others to be able to afford a home in the first place, still others because the advertisements informed them that they could use their home equity to leverage funds for home improvements, education, and medical expenses.  Let’s assume that our exemplary lady isn’t a mortgage specialist, and that someone sold her on the ARM idea — She could remain in her home, the payments would be affordable, and everything would be fine — until the resets kicked in.

What homebuyers and those who refinanced may not have known about ARMs wasn’t clearly communicated until 2006, and even then the cheerleaders for the mortgage industry were far more audible than the cautious voices on the sidelines who advised:

“The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.”  [BusinessWeek 2006]

Why sell these risky and complicated mortgages?  The benefits all accrued to those in the financial sector selling the ARMs.

“There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home.”  [BusinessWeek 2006]

In addition to the higher commissions, the revenue accounting tricks, and the interests of hedge funds, the housing bubble inflated the mortgage bubble in the secondary markets.  Countrywide and other lenders fueled the Wall Street appetite for a continuous and bountiful stream of mortgages — and we know the rest of the drill:  The mortgages were bundled, stashed in some off-shore trust account, sliced-diced-tranched into CDOs, rated by “issuer pays” ratings agencies as Double Plus Good investments, and then bet on like nags at the track by the gamblers on Wall Street.

The End

And, so what do the Gamblers on Wall Street say now?  The narrative went out from the bankers and their allies that the individuals like the lady in Spanish Springs were the exceptions, the rule was the “greedy irresponsible borrower:”

They bought their home in February 2005 with a zero percent down loan with two years of reduced payments that were essentially partial interest. In December of that year, a second was taken out on the home. It was done on “equity” that the home gained in 11 months. The loan wasn’t huge but they were able to pull out $20,000. County documents don’t tell you what they spent the money on but it certainly wasn’t on home improvements.   “They are the home buyer(s) who symbolizes the foreclosure mess, not the struggling single woman or the misled farm workers. They bought with nothing into the home. They went into not viewing the house as a home but as a source of wealth that they could access when they wanted for fun money.” [MantecaBulletin]

Music to the Wall Street magicians’ ears!  Shift the narrative such that the majority of the people facing foreclosure are the “irresponsible” ones, NOT the mortgage vendor getting extra money for writing ARMs, NOT the banking houses crafting the ever-more complicated and disastrous derivatives, NOT the ratings agencies that took the money for the phony Double Plus Good ratings, and NOT the bankers who benefited from the revenue accrued by trading swaps and other pieces of paper until no one could figure out who owned what and where.   But wait, the lady in Spanish Springs doesn’t fit that photograph:

“Many people were walking away intentionally to screw the banks,” Jacober said. “But I refused to do that. My belief is, you signed a contract and you should be obligated to pay it. I wasn’t asking them for freebies. They’re going to get all their money back from me. I just wanted a little help.” [RGJ]

The bankers got free money, credit amnesty, “stupidity insurance,” ungraduated taxation, and get out of jail free cards [Taibbi] What have we done for the lady in Spanish Springs lately?