Banks Cover Up Their Actual Losses and Insolvency

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RECEIVERS SHOULD BE APPOINTED TO FORCE DISGORGEMENT OF PENSION MONEY

Editor’s Note: It isn’t just the Banks that are covering up the fact that those “assets” on their balance sheet are not assets and never were owned by the Banks. The underlying threat here is that the loss is going to hit pension funds and other “investors” in RMBS whose money was used to fund mortgages (after the investment banks took a huge bite out of the pool of funds as “trading profits”). Pensioners are already getting notices of cutbacks and even elimination of the pension benefits.

This is all brought to you by the makers of such accounting tricks like “off balance sheet transactions.” Try telling your boss that the money you stole was an off balance sheet transaction and see if that covers it — or if you end up a guest of the state or federal government in prison.

RMBS Losses in Limbo: As Bad As They Seem, The Reality May Be Much Worse

By Ann Rutledge | Published: January 25, 2012

Since the financial crisis in 2007, residential mortgage-backed securities have been hit with high levels of borrower defaults, realized losses and credit rating downgrades.  Realized losses declared on private residential mortgage-backed securities (RMBS), already much higher than original rating agency and investor estimates, are projected to rise substantially in the coming months, according to a recent analysis by R&R Consulting, a credit rating and valuation firm in New York.

On the securities performing at December 2011, a universe of approximately $1.42 trillion, R&R estimate the amount of additional losses likely to materialize is $300 billion, with one-third concentrated in ten arranger names, including Countrywide, Morgan Stanley and JP Morgan. About 17,000 tranches, or 34% of the universe analyzed by R&R, may lose up to 83% of their remaining principal.

In addition, R&R estimates that approximately $175 billion of losses already incurred on the loans have not yet been allocated to the bonds in the related transactions. Failure to allocate realized loan losses could distort the valuation of related RMBS tranches.

“The light at the end of the tunnel is still a long way off for RMBS,” said Iuliia Palamar, head of ABS research for R&R.  “We are now drilling down into the analysis to identify the individual transactions by vintage, servicer and other important issues with respect to these losses.”

Unallocated Losses by Security VintageUnallocated Losses by Security Vintage

In the course of conducting valuations on RMBS, the R&R analytics team discovered widespread, serious, repeated data discrepancies. Ann Rutledge, a founding principal, asked the team to measure the magnitude of the discrepancy on the RMBS universe. To do this, R&R subtracted cumulative losses allocated to the tranches from unallocated, expected losses, calculated as the sum of defaults, bankruptcies, foreclosures and REOs minus recoveries. “The results were very disturbing: $175 billion of unallocated current losses and $300 billion of imminent losses,” Rutledge said.

Rutledge commented that she was not clear why these losses are being held in limbo instead of being properly allocated, since the data used by R&R in the calculations were included in the servicer reports. She cautioned, “Investors should be concerned about receiving inaccurate bond performance information and paying unnecessary fees.”

The implication for bond holders in RMBS is significant with respect to both estimates.  Subordinated securities in the RMBS with probable future losses ought to be written down by such losses but instead may be continuing to receive interest owed to more senior tranches. It could also mean that servicers are earning fees against loans that have already been liquidated, which also reduces the amount of cash to pay senior bond holders.  For example, in one month, servicers could generate $75 million or more in inappropriate fees against the $175 billion in unallocated losses.

Rutledge also noted that R&R has observed a steady increase in amount of limbo losses, raising the prospect that a significant amount of funds are still being misallocated for bond investors.

“The system for MBS is still fundamentally broken,” she said. “All the loose ends need to be identified and knit together into a well-functioning system before investors can feel comfortable investing in RMBS once more.”

R&R Consulting is a credit rating and valuation boutique. Founded in 2000, R&R has a patented process for obtaining current intrinsic valuations on structured securities in the secondary market.

Inquiries should contact Iuliia Palamar at +12128675693 or iuliia@creditspectrum.com

 

BOA FUNDS MORTGAGE ON STOLEN HOUSE AND BLAMES BORROWER — FIRST AMERICAN TITLE DENIES LIABILITY

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SEE VIDEO: HOW COULD THE TITLE COMPANY AND BOA CLOSE ON A LOAN WHERE THE BUYER DID NOT GET TITLE?

At first blush this story seems like a standard scam story and an unfortunate couple who bought the house, spent money on upgrades, paid all their mortgage payments and are now told they are faced with eviction from a home this is not theirs. But where is the title insurance protection that should be present? It is exactly where I told you it would be. The title companies, this one is First American, are denying coverage. The thief in this case is not a securitization party but the effect is the same. BOA is telling the couple that if they don’t pay the mortgage their credit will be ruined.

So they have a mortgage without a house. How is that possible? I’ll tell you how. The old owner abandoned the house allowing a scam artist to pretend to be the owner because the old owner was not around and didn’t care. Hmmmm. Wait that sounds familiar.

In the securitized mortgages, the investor has abandoned their claim against the “borrowers” and they are suing the investment bankers instead. That creates the same void as this scam. Only in “securitized” loans the scam artist that pretends to own the loan is a bank or some “bankruptcy-remote entity” that was created to serve the bank. Did you even wonder why the Banks went to all the trouble of inserting “bankruptcy remote” straw-men at loan closings? I think it is because they knew from the start this was eventually going to blow up and collapse.

The title company didn’t give a damn as long as they got their fee for the closing so they never did the work they were supposed to do. BOA didn’t care because they were not using their own money or had changed their habits because they usually don’t use their own money or credit. So these people got screwed by the title company and the “lender” who by the way does not have a perfected lien on the property (just like the “securitized” crap they sold to borrowers and investors).

Isn’t this interesting? Now BOA must figure out a way to resolve this without conceding that if the documentation was not in the chain of title as recorded in the title registry, there is no mortgage and thus nothing to foreclose. If this goes to court, BOA has a real problem, doesn’t it. They want to say that the borrower still owes them the money that was in fact funded AND they want to have a lien, but they can’t so they can’t foreclose. Thus this is exactly the same as ALL securitized loans.

The defects in the chain of title and the obvious shell game of names is not merely a technicality — it is the bedrock of a stable marketplace where if you buy something you should be getting clear title to it. The title company now says they are not liable for misrepresenting title. That the contract for insurance merely represents the risks they were willing to take and that if there was fraud in the title chain they are not liable. So what we have here is that no matter how many precautions the buyer-borrower takes he can still get screwed by the big guys. This isn’t caveat emptor (buyer beware) this is buyer be screwed.

And THAT is why the corrupted title mess extending to more than 80 million real estate transactions involving residential swellings cannot be solved — the players don’t want to solve it.

Special Servicing Agreement: DENIES ANY INTEREST IN INVESTMENT VEHICLES OR MORTGAGES

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FROM MARY COCHRANE: MANY THANKS FOR YOUR EXCELLENT WORK

Do you know what ‘xxx’ your loan is inside of? Do you know who really is in court as Plaintiff? Did you get a name affidavit signed?

Read Special Servicing Agreement.

Special Servicer “REO Broker’ c/o Special Servicer ‘Corporation as Lender’ of real Servicer (Note Holder in Due Course) as Lender (real lender) holding unsecured note transaction between seller and purchaser ‘registered in an electronic database’ is all MERS is.

Securities & Exchange Commission’s Regulation of Asset-Backed Securities: … function such as Master Servicer, administrator, primary Servicer, Special Servicer, affiliated Servicer and unaffiliated Servicer. The SEC noted there is …
http://www.mortgagebankers.org/files/…/WhitePaper-_Final_REGAB.pdf – Similar

PDF] MEMORANDUM The company is one of the nation’s largest commercial loan servicers with over $294 billion in outstanding balances. As special servicer …www.sec.gov/comments/s7-08-10/s70810-195.pdf

Investment Company Act of 1940 — Section 3(c)(5)(C )
Capital Trust, Inc
February 3, 2009
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Our Ref. No. 2007-121113
File No. 132-3

In your letter, dated January 29, 2009, you request that we concur with your view that certain subordinate participations in commercial real estate first mortgage loans, as described below, that are held by Capital Trust, Inc., a public company incorporated in the state of Maryland that has elected treatment as a real estate investment trust for federal tax law purposes (the “Company”), would be considered qualifying interests, as defined below, for purposes of the exclusion from the definition of investment company in Section 3(c)(5)(C) of the Investment Company Act of 1940 (“Act”).

Facts
You state that the Company engages primarily in commercial real estate financing by originating and purchasing commercial real estate debt and related instruments for its own accounts as well as the accounts of investment vehicles that the Company manages. You state that among the types of investments the Company makes are investments in A/B commercial mortgage loan financing arrangements (“A/B financings”). You explain that in an A/B financing, the principal balance of a single commercial mortgage loan is divided between two or more mortgage lenders as a means of spreading the credit risk associated with the mortgage loan between the lenders. You state that unlike a mortgage loan participation where each loan participant has a pari passu interest in the mortgage loan, an A/B financing is a senior/subordinated structure. The senior participation, called the “A-Note,” has priority over the junior participation, called the “B-Note,” with respect to the allocation of payments made on the mortgage loan.1 You explain that all periodic payments made by the borrower on the underlying mortgage loan are allocated first to the A-Note holder, as senior lender, in accordance with the terms of the A/B financing and then to the B-Note holder, as junior lender. Similarly, you explain that in the event of a default on the mortgage loan, all collections or recoveries on the loan are allocated first to the A-Note holder until the A-Note holder has been fully paid before any payments are made to the B-Note holder. You further state that any losses incurred with respect to the loan are allocated first to the B-Note holder and then to the A-Note holder. You state that the loan is fully secured by a mortgage on the underlying commercial property and the value of the underlying commercial property at the time of the A/B financing always exceeds the combined principal balance of the B-Note and the A-Note.

You state that in the typical A/B financing in which the Company invests, a lender enters into a mortgage arrangement with a borrower and then participates the mortgage loan to form an A/B financing structure. The lender, who holds legal title to the mortgage loan and is listed as the lender of record, retains the A-Note but sells the B-Note to the Company. You state that the Company as B-Note holder obtains the right to receive from the A-Note holder the Company’s proportionate share of the interest and the principal payments made on the mortgage loan by the borrower at the time such payments are made, and the Company’s returns on its B-Note investment are based on the principal and interest payments made by the borrower.

You state that in some A/B financings, the B-Note holder’s participation interest is evidenced by a separate note issued by the borrower to the B-Note holder and which is directly secured by the mortgage.2 You explain that in these types of A/B financings, the Company as B-Note holder is in contractual privity with the borrower with respect to the underlying mortgage loan and thus payment on the B-Note should not be affected in the event of the bankruptcy of the A-Note holder.3 You state that in other A/B financings in which the Company invests, the B-Note holder holds a participating beneficial ownership interest in the mortgage loan and mortgage loan proceeds. The participation interest, however, is not evidenced by a separate note from the borrower and thus the Company as B-Note holder is not in contractual privity with the borrower.4 You note that the Company arguably could have difficulty obtaining payment in the event that the A-Note holder files for bankruptcy.5 You state that, with the exception of the bankruptcy issue, the two types of A/B financings are similar in all other material respects.

You state that the Company as B-Note holder enters into an agreement with the A-Note holder that sets forth the rights and obligations of the parties (“Agreement”). You explain that under the Agreement, the A-Note holder is afforded the sole and exclusive authority to administer and service the mortgage loan so long as the mortgage loan is a performing loan. The Agreement, however, provides the Company as B-Note holder with approval rights with respect to any decisions relating to material modifications to the loan agreements, or in connection with any material decisions pertaining to the administration and servicing of the mortgage loan.

You state that the Agreement also grants the Company as B-Note holder the right to control the administration and servicing of the loan in the event that the loan becomes a non-performing loan (“control rights”).6 You state that these control rights include the right to appoint a special servicer to manage the resolution of the non-performing loan, including any proposed foreclosure or workout of the loan.7 You state that the Company generally will have the right to advise, direct, or approve certain actions to be taken by the special servicer, including those with respect to any modification or forgiveness of principal or interest in connection with the defaulted loan, any proposed foreclosure of the mortgage loan or acquisition of the underlying property by deed-in-lieu of foreclosure or any proposed sale of a defaulted mortgage loan. You state that the special servicer is generally obligated to follow the Company’s decisions unless the special servicer believes that doing so would violate any applicable law or provisions of any agreement applicable to the financing arrangement. In addition, you state that the special servicer is subject to the limitations prescribed by a “servicing standard,” which requires the special servicer to act in the best interests of both the A-Note holder and the Company as B-Note holder and in a commercially reasonable manner. The Company, however, for any reason has the right to terminate and replace the special servicer.

You also state that the Company as B-Note holder has the right to receive written notice with respect to the performance of the mortgage loan and all reasonably requested information in connection with the exercise of the B-Note holder’s rights. You further state that the Company also has the right to cure any monetary and non-monetary defaults on the mortgage loan. Finally, you state that the Company may purchase the A-Note at a price of par plus interest in the event that the loan becomes non-performing.

Analysis
Section 3(c)(5)(C) of the Act
Section 3(a)(1) of the Act, in relevant part, defines an investment company as any issuer that is, or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of Government securities and cash) on an unconsolidated basis.8 Section 3(c)(5)(C) of the Act, in relevant part, provides an exclusion from the definition of investment company for any issuer that is “primarily engaged in … purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” We previously have taken the position that an issuer may not rely on the exclusion provided by Section 3(c)(5)(C) unless at least 55% of its assets consist of “mortgages and other liens on and interests in real estate” (called “qualifying interests”) and the remaining 45% of its assets consist primarily of real estate-type interests.9 To meet the 45% real estate-type interests test, an issuer must invest at least 25% of its total assets in real estate-type interests (subject to reduction to the extent that the issuer invests more than 55% of its total assets in qualifying interests) and may invest no more than 20% of its total assets in miscellaneous investments.10

We generally take the position that a qualifying interest is an asset that represents an actual interest in real estate or is a loan or lien fully secured by real estate. Thus, for example, we have not objected if an issuer treats as qualifying interests, among other things, fee interests in real estate,11 mortgage loans fully secured by real property,12 notes secured by a pool of whole mortgage loans,13 second mortgages secured by real property,14 and leasehold interests secured solely by real property.15 We also take the position that an asset that can be viewed as being the functional equivalent of, and provide its holder with the same economic experience as, a direct investment in real estate or in a loan or lien fully secured by real estate, may be considered to be a qualifying interest for purposes of Section 3(c)(5)(C).16

We take the position, however, that an asset is not a qualifying interest for purposes of Section 3(c)(5)(C) if it is an interest in the nature of a security in another person engaged in the real estate business.17 For this reason, we generally take the position that an issuer that is engaged primarily in purchasing or otherwise acquiring participations or fractionalized interests in individual or pooled mortgages or deeds of trust is not entitled to rely on Section 3(c)(5)(C).18 We have, however, taken the position that an issuer that holds mortgage participation interests may nevertheless rely on Section 3(c)(5)(C) if the mortgage participation interests have attributes that would classify them as being interests in real estate rather than as being interests in the nature of a security in another person engaged in the real estate business. For example, in several instances we have taken the position that a trust that held participation interests in construction period mortgage loans acquired from mortgage lenders may rely on Section 3(c)(5)(C).19 We explained that each mortgage participation interest held by the trust was an interest in real estate because the participation interest was in a mortgage loan that was fully secured by real property and the trustee had the right by itself to foreclose on the mortgage securing the loan in the event of default.20

B-Notes as Qualifying Interests
You argue that the B-Notes that you describe in your letter should be considered to be qualifying interests for purposes of Section 3(c)(5)(C). You argue that each B-Note has attributes that, when taken together, would allow it to be classified as an interest in real estate rather than an interest in the nature of a security issued by a person that is engaged in the real estate business (i.e., the A-Note holder), notwithstanding that the B-Note holder does not have the right by itself to foreclose on the mortgage loan, which was a condition to the granting of relief in prior letters.21

In support of your position, you argue first that a B-Note is a participation interest in a mortgage loan that is fully secured by real property, and is not a loan extended to the A-Note holder. You state that the B-Note is not an interest in the A-Note holder with payment depending on the profits generated by the A-Note holder’s operations. Rather, you explain that payment on the B-Note is based on the interest and principal payments made by the borrower on the underlying mortgage loan.22 As such, you state that the Company invests in a B-Note only after performing the same type of due diligence and credit underwriting procedures that it would perform if it were underwriting the entire mortgage loan.23 You state that the A-Note holder does not guarantee payment of the B-Note holder’s share of interest and principal payments received from the borrower on the underlying mortgage loan.24 Accordingly, you argue that the B-Note holder looks to the borrower for payment on its B-Note and not to the A-Note holder.

You also state that the Company as B-Note holder has rights with respect to the administration and servicing of the mortgage loan that further suggest that the B-Note is an interest in real estate. Although the A-Note holder has the exclusive authority to administer and service the mortgage loan as long as the loan is a performing loan, you represent that the Company as B-Note holder has approval rights in connection with any material decisions pertaining to the administration and servicing of the loan, including decisions relating to leasing and budget requests from the borrower. You also represent that the B-Note holder has approval rights with respect to any material modification to the loan agreements.

Finally, you argue that that the Company as B-Note holder has effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, in the event that the loan becomes non-performing. You state that the Company has such rights notwithstanding the fact that the Company does not have the unilateral right to foreclose on the mortgage loan, or that the special servicer is required to act in the best interests of both the A-Note holder and the B-Note holder under the special servicing standard. In particular, you represent that the Company as B-Note holder has the right to select the special servicer, and often appoints its wholly owned subsidiary to act in that role. You state that in the event that the mortgage loan becomes non-performing, the Company is able to pursue the remedies it desires by advising, directing or approving the actions of the special servicer. If the Company is dissatisfied with the remedy selected by the special servicer, you represent that the Company may: (1) terminate and replace the special servicer at any time with or without cause; (2) cure the default so that the mortgage loan is no longer non-performing; or (3) purchase the A-Note at par plus accrued interest, thereby acquiring the entire mortgage loan.

Conclusion
Based on the facts and representations in your letter, we agree that the B-Notes which you describe in your letter are interests in real estate and not interests in the nature of a security in another person engaged in the real estate business.25 In taking this position we note in particular your representations that: (1) a B-Note is a participation interest in a mortgage loan that is fully secured by real property; (2) the Company as B-Note holder has the right to receive its proportionate share of the interest and the principal payments made on the mortgage loan by the borrower, and that the Company’s returns on the B-Note are based on such payments;26 (3) the Company invests in B-Notes only after performing the same type of due diligence and credit underwriting procedures that it would perform if it were underwriting the underlying mortgage loan; (4) the Company as B-Note holder has approval rights in connection with any material decisions pertaining to the administration and servicing of the loan and with respect to any material modification to the loan agreements; and (5) in the event that the loan becomes non-performing, the Company as B-Note holder has effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, by having the right to: (a) appoint the special servicer to manage the resolution of the loan; (b) advise, direct or approve the actions of the special servicer; (c) terminate the special servicer at any time with or without cause; (d) cure the default so that the mortgage loan is no longer non-performing; and (e) purchase the A-Note at par plus accrued interest, thereby acquiring the entire mortgage loan.27

We therefore concur with your view that the B-Notes described in your letter may be considered qualifying interests for purposes of the exclusion from the definition of investment company provided by Section 3(c)(5)(C). Please note that our views are based upon the facts and representations contained in your letter and that any different facts or representations may require a different conclusion.

Rochelle Kauffman Plesset
Senior Counsel

Endnotes

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1 You state that when a commercial mortgage loan is divided into more than two participations, the participation may be designated as an A-Note, a B-1 Note, a B-2 Note, a B-3 Note, etc. For purposes of this letter, in cases in which there are more than two participations, the term “B-Note” is used to refer to the most junior participation.

2 You explain, however, that the B-Note is different from a second mortgage loan because the B-Note represents a participation interest in a single mortgage loan, whereas a second mortgage loan represents the issuance and administration of a separate loan. You also explain that the separate note issued by the borrower evidences a participation in a mortgage loan and not an interest in a whole, unparticipated mortgage loan held by a single mortgagee.

3 You explain that since a B-Note evidenced by a separate note is an actual note conveying to the B-Note holder a portion of the mortgage that is secured by the recorded mortgage, the B-Note holder’s right to receive its share of the interest and principal payments made by the borrower on the underlying mortgage loan should not be part of the A-Note holder’s estate in the event that the A-Note holder becomes bankrupt.

4 You state that in these cases the original lending transaction already may have been structured as a single note mortgage financing at the time the Company is given the opportunity to acquire a participating interest in the mortgage loan. You explain that it would be difficult to later provide for the issuance of two separate notes because it would require that the borrower and the mortgage lender modify the documentation of the original lending transaction.

5 You suggest that in the event of the A-Note holder’s bankruptcy, the status of the B-Note holder is unclear under the United States Bankruptcy Code if the B-Note holder does not hold a separate note. You explain that it is possible that in such an event, the B-Note holder could be treated as an unsecured creditor of the A-Note holder, notwithstanding your view that the B-Note holder is holding a participation interest in a mortgage loan and not a loan from the A-Note holder. See infra notes 22, 24.

6 You state that the B-Note holder may exercise its control rights under the terms of the Agreement either directly or indirectly by appointing a third party (called an operating advisor) to administer its rights. You also state that generally the B-Note holder retains these control rights only so long as its position in the mortgage loan is deemed to have “value,” based upon an appraisal. You state that the B-Note has “value,” for this purpose, if the initial principal amount of the B-Note (adjusted for prepayments, debt write-downs and appraisal reduction amounts applied to the B-Note) exceeds 25% of the initial principal amount of the B-Note (adjusted for prepayments). You state that an “appraisal reduction amount,” for this purpose, generally is the amount by which the full outstanding mortgage indebtedness exceeds 90% of the appraised value of the underlying real property. If the appraisal indicates that the B-Note does not have “value,” the B-Note holder’s control rights are forfeited to the A-Note holder.

7 You state that the Company’s wholly owned subsidiary, CT Investment Management Co., often serves as special servicer for many of the Company’s real estate debt financing investments.

8 Section 3(a)(2) defines “investment securities” to include all securities except (A) Government securities, (B) securities issued by employees’ securities companies, and (C) securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Act.

9 See, e.g., Citytrust, SEC Staff No-Action Letter (Dec. 19, 1990); Greenwich Capital Acceptance Inc., SEC Staff No-Action Letter (Aug. 8, 1991).

10 See, e.g., id.

11 See, e.g., United Bankers, SEC Staff No-Action Letter (Mar. 23, 1988).

12 See, e.g., United States Property Investment N.V., SEC Staff No-Action Letter (May 1, 1989).

13 See, e.g., Premier Mortgage Corp., SEC Staff No-Action Letter (Mar. 14, 1983).

14 See, e.g., Prudential Mortgage Bankers & Investment Corp., SEC Staff No-Action Letter (Dec. 4, 1977); The State Street Mortgage Co., SEC Staff No-Action Letter (July 17, 1986).

15 See, e.g., Health Facility Credit Corp., SEC Staff No-Action Letter (Feb. 6, 1985).

16 See Capital Trust Inc., SEC Staff No-Action Letter (May 24, 2007) (a Tier 1 mezzanine loan under certain conditions may be considered to be a qualifying interest where the loan can be viewed as being the functional equivalent of, and provide its holder with the same economic experience as, a second mortgage which is a qualifying interest for purposes of Section 3(c)(5)(C)).

17 See, e.g., The Realex Capital, SEC Staff No-Action Letter (Mar. 19, 1984) (Section 3(c)(5)(C) is not available to an issuer that invests solely in limited partnership interests in an underlying limited partnership that would own and operate a building).

18 MGIC Mortgage Corp., SEC Staff No-Action Letters (Oct. 6, 1972 and Aug. 1, 1974).

19 See Northwestern Ohio Building and Construction Trades Foundation, SEC Staff No-Action Letter (Apr. 20, 1984); Baton Rouge Building and Construction Industry Foundation, SEC Staff No-Action Letter (Aug. 31, 1984); Dayton Area Building and Construction, SEC Staff No-Action Letter (May 7, 1987).

20 Id. We have also granted no-action relief to an issuer that acquired whole mortgage loans or pools of whole mortgage loans and then sold participation interests in such assets. Relief was conditioned on the issuer retaining a continuing percentage ownership interest of at least 10% in each of the whole mortgage loans or pools of mortgage loans which it had fractionalized; the issuer alone was the formal record owner; and the issuer throughout the life of the participation had complete supervisory responsibility with respect to the servicing of the mortgage loans and had sole discretion regarding the enforcement of collections and the institution and prosecution of foreclosure or similar proceedings in the event of default. We stated that these conditions were intended to ensure that the issuer would “have a substantial continuing ownership interest in … [the underlying whole mortgages and pools of such mortgages] and [the] unrestricted control over the enforcement of the lien and other matters with respect to such mortgage loans so that the interest retained by the [issuer] would be an interest in real estate within the meaning of Section 3(c)(5)(C) of the Act rather than an interest in the nature of a security in another person engaged in the real estate business.” MGIC Mortgage Corp., SEC Staff No-Action Letter (Aug. 1, 1974).

21 See, e.g., id.

22 You suggest, however, that in the event that the A-Note holder becomes bankrupt and the B-Note holder is treated as an unsecured creditor of the A-Note holder, the B-Note holder may not receive its full payment on the B-Note notwithstanding the fact that the borrower has been making full and timely payments on the underlying mortgage loan. See supra note 5. You state that in the event that this will occur, the B-Note will no longer be considered an interest in real estate and thus will no longer be treated as a qualifying interest for purposes of Section 3(c)(5)(C).

23 You explain that, like the procedures for investing in whole mortgages, the procedures that the Company performs prior to investing in B-Notes include hands-on analysis of the underlying collateral for the loan, market analysis, tenant analysis, financial analysis, visits to the property, borrower background checks, and lease and contract review. You also note that the Company performs its own independent analysis and does not rely on the A-Note holder’s analysis or conclusion on the creditworthiness of the mortgage loan borrower.

24 In addition, you state that the following additional factors indicate that the B-Note is a mortgage loan participation interest and not a loan extended to the A-Note holder: (1) there is no difference in term to maturity contained in the B-Note and the underlying mortgage loan; (2) the total payments made by the borrower on the underlying mortgage loan do not exceed the aggregate payments made on the A-Note and the B-Note; and (3) there is no difference in scheduled payment terms between the borrower and the A-Note holder, and between the A-Note holder and the Company, except for the priority in the allocation of interest and principal payments granted to the A-Note holder by virtue of its position as senior participant. Furthermore, you state that, although there is a difference in the interest rate due on the underlying mortgage loan and the B-Note, the difference is due to the legitimate risk premium that the B-Note holder receives on assuming first loss. You state that your view that the B-Notes described in your letter are true participations and not loans extended to the A-Note holder is based on an evaluation of the factors that the courts have considered in similar cases. See, e.g., In re Churchill Mortgage Investment Corp., 233 B.R. 61 (Bankr. S.D.N.Y. 1999); In re Sprint Mortgage Bankers Corp., 164 B.R. 224 (Bankr. E.D.N.Y. 1994).

25 You have not asked for, and we are not expressing, a view on whether an A-Note, as you describe in your letter, is a qualifying interest for purposes of Section 3(c)(5)(C) notwithstanding the fact that, as you represent, the B-Note holder has effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, in the event that the loan becomes non-performing.

26 See supra note 22.

27 As indicated above, while the right to foreclose is an important attribute to consider when determining whether an asset should be considered a qualifying interest, we believe that, in addition to this attribute, other attributes of an asset need also be considered when making such a determination. We note, however, that at this time we are not withdrawing any previous no-action positions that have not addressed this point.

Incoming Letter

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The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/investment/noaction/2009/capitaltrust020309-3c5c.htm

NY and DE Examine Trust Documentation: Pandora’s Box Open

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WHY YOU NEED TO ATTEND GARFIELD CONTINUUM SEMINAR

If you don’t understand why the bundling of mortgages at the level of the investment banks is important to your case(s) involving securitized mortgages, then you don’t “get it” yet. It isn’t that you need to be an expert in securitization to win cases at the loan level and foreclosures, it is that you need to know key factors that affect the title, liability and ownership of the home, the obligation, note and mortgage. The inquiry referred to below runs to the heart of this issue.

WRONG QUESTION: People are asking where is my loan? What is the name of the Trust in which my loan is located? They should be asking what trust(s) or pools CLAIM to have an interest in your loan and do they really have it. That’s why the COMBO Title and Securitization Analysis, the Forensic Analysis and the Loan Level Accounting is so important. People ask “how do I prove which trust owns the pool?” Wrong question. The party seeking foreclosure needs to prove up ownership, not you. The real question is how do you turn the Judges head to see that your denial of the default, your denial of the mortgage, note and obligation is anything more than a delay tactic?

The banks and many “experts” are busy explaining securitization as though the loans were actually securitized. They were not. And THAT is of key relevance as to who can declare a default, whether they even know if there is a default, and the identity of the party(ies) who can enforce the obligation. It isn’t that you are required to prove THEIR case, it is all about knowing when to raise objections, what evidence to demand (knowing what the result will be) and creating insurmountable obstacles to the pretender lenders who don’t have a dime in the deal but want to foreclose anyway.

If you know the securitization scheme, because you have a report and analysis in your had, and you know how to use it because you have attended our seminar, you are standing in a much stronger position than simply quoting the blog. Knowing the truth is one thing, knowing what to do with the truth is another.

Here was have a story about how the only two states under whose laws these so-called trusts were created, are investigating to see if the trusts exists, and if so, what is in them. What they are going to find is that there is no trust because there is nothing in them. Your loan, although claimed by the trust, never made it into the pool. It never made it into the pool because (a) the mortgages, notes and closing documentation were defective in the first instance and (b) they never even made the attempt to cover their mess up with paperwork until they were challenged in court — years after the deadlines when they might have claimed any such right.

But they are also going to find that the money trail tells a a whole different story. The loan transaction wasn’t between the homeowner and the payee on the note. It was between the homeowner and the investor-lender. But the investor lender got an entirely different set of paperwork than the paperwork given to the homeowner at the closing of the loan. And the paperwork given to the investor-lender was rife with errors, lies and misleading statements. These offices of Attorney general in New York and Delaware are going to find that the entire chain is corrupted, that the only document in the registry of title in the County in which the property is located is a mortgage securing an obligation that does not exist — because it secures an obligation as described on a note signed by the homeowner containing the wrong parties and the wrong terms.

And so they are going to find out that there could be some type of enforcement of the undocumented obligation (not the note), but there won’t be because the investor-lenders are not interested in getting into pitched battle with homeowners, nor do they want to take a position in court that would be construed as an admission against their own interest. The admission would be that the mortgage documents were legal, valid and enforceable. The investors are saying that the mortgages were garbage and unenforceable when they sue the investment bankers for 100 cents on the dollar. The pretenders are trying to bootstrap their own intentional scrambling of the documentation into a right to claim property and take the homeowner out from his dwelling on the strength of defective documents — not on the strength of a case where the homeowner borrower money from them, owes them any money or even knew of their existence when the loan was closed.

Two States Ask if Paperwork in Mortgage Bundling Was Complete

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Opening a new line of inquiry into the problems that have beset the mortgage loan process, two state attorneys general are investigating Wall Street’s bundling of these loans into securities to determine whether they were properly documented and valid.

The investigation is being led by Eric T. Schneiderman, the attorney general of New York, who has teamed with Joseph R. Biden III, his counterpart from Delaware. Their effort centers on the back end of the mortgage assembly lines — where big banks serve as trustees overseeing the securities for investors — according to two people briefed on the inquiry but who were not authorized to speak publicly about it.

The attorneys general have requested information from Bank of New York Mellon and Deutsche Bank, the two largest firms acting as trustees. Trustee banks have not been a focus of other investigations because they are administrators of the securities and did not originate the loans or service them. But as administrators they were required to ensure that the documentation was proper and complete.

Both attorneys general are investigating other practices that fueled the mortgage boom and subsequent bust. The latest inquiry represents another avenue of scrutiny of the inner workings of Wall Street’s mortgage securitization machine, which transformed individual home loans into bundles of loans that were then sold to investors.

It follows months of sharp criticism of the mortgage foreclosure process, which produced an uproar last year over shoddy paperwork and possible forgeries of legal documents by banks, other lenders or their representatives.

The slipshod practices in foreclosures led to further questions about whether all the necessary documents were delivered to the trusts and properly administered by them.

Some of the nation’s biggest mortgage servicers are currently in negotiations with a group of state attorneys general to settle an investigation into foreclosure abuses. The new inquiry by New York and Delaware indicates the big banks’ troubles may not end even if a settlement is reached in the foreclosure matter.

The stakes are potentially high. If the trustees did not follow the rules set out in the prospectus, they may be liable for breaching their duties to investors who bought the securities. That could expose the banks to costly civil litigation.

Spokesmen from Bank of New York and Deutsche Bank declined to comment about the investigation, as did representatives from the offices of both attorneys general.

A complex process that produced hundreds of billions of dollars in securities during the lending boom, the issuance of mortgage securities began with home loans, which were then bundled into investments and sold to pension funds, mutual funds, big banks and other investors. The bundles were created as trusts overseen by institutions such as Bank of New York and Deutsche Bank; they were supposed to make sure the complete mortgage files for each loan were delivered within a specified time and with the proper documentation.

After the securities were sold, the trustees disbursed interest and principal payments to investors over the life of the trusts.

The trusts were governed by the laws of the states in which they were set up. Roughly 80 percent of the trusts are governed by New York law with the rest by Delaware law.

The rules governing the securitization process are labyrinthine, and there are steps required if the investment is to comply with tax laws and promises made by the issuer in its offering document. If the trusts did not comply with tax laws, for example, the beneficial treatment given to investors could be rescinded, causing taxes to be levied on the transactions.

The terms of these mortgage deals varied, but many of them required that the trustee examine each of the loan files as soon as they came in from the Wall Street firm or bank issuing the security. For a file to be complete, it would typically have to include all of the information necessary to establish a chain of ownership through the various steps of the bundling process, as when the originator transferred it to the issuer of the security who then moved it to the trustee.

Complete loan files were supposed to be delivered to the trusts within 90 days in most cases. If the trustee found any missing or defective documents, it was supposed to notify the loan originator so that it could either cure the deficiency or replace the loan. Such substitutions are typically allowed only in the early years of the trust.

By asking for documents relating to this process, investigators are trying to determine if the trustees fulfilled their obligations to the investors who bought the mortgage deals, according to the people briefed on the inquiry.

NORRIS: LAWSUITS AGAINST AUDITORS ARE COMING AND THEY WILL BE HUGE

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CLASS ACTION LAWYERS SHOULD LOOK AT A HOMEOWNER SUITS AGAINST MEGABANK AUDITORS

AUDIT STANDARDS REQUIRE A HEALTHY DEGREE OF “SKEPTICISM”

 

EDITOR’S NOTE: 4 years ago, I spoke with some people in the big SEC auditing firms that give “clean” letters to public companies stating that the financial statements are a fair representation of the financial condition and operations during the period covered by the statements. Those of us who studied auditing, or like me who have taught auditing, know that those clean statements have not been true for decades, including most notably the absence of a caveat regarding the viability of the companies that were engaged in questionable and in some cases unfathomable transactions involving exotic financial instruments. If Alan Greenspan couldn’t understand it, then how could the auditor write a letter like that for JPM, Citi, BOA, Wells Fargo, Chase, et al?

Like the false appraisals by a rating agencies for these exotic instruments, and like the false appraisals coming from lenders who hired appraisers to “come in” at the necessary fair market value of the underlying property in order to close the deal so they could quickly take their fees and toss the risk onto investors and homeowners, the absence of the auditors screams out for justice. What would have happened if the auditors said flat out that the viability of these megabanks was in question in the event these exotic instruments imploded,, and that there was no way for them to accurately confirm the value that management had placed on them nor anyway to confirm that they were tier 1, 2 or 3 assets?

The question answers itself. Without a clean letter, the companies would have been forced into a policy of reporting that was transparent which, after all, is the reason for the audit — so the investors, prospective investors and customers and vendors of the company can accurately assess their risk in doing business with these megabanks. What would have happened? We all know. If the statements showed what we know today to have been the truth all along, the entire securitization illusion would have collapsed even as it began, and the Great Recession would never have occurred, the housing market would never have gone thorough the gyration that now effect virtually 100% of all Americans, directly or indirectly, and the life-styles and in some cases the lives of depressed people who took the lives of their families and then themselves would never have in the history books or on the media — because they would have been non-existent.

 

Troubled Audit Opinions

By

On one side is an assessment of a company with a clean audit opinion from the Toronto office of Ernst & Young, and with bonds rated just below investment grade by Standard & Poor’s and Moody’s. It has raised billions in capital markets.

On the other is an investment research firm using the name Muddy Waters Research. It says the company, the Sino-Forest Corporation, is a fraud, and that its shares are worthless.

As this is written, there is no definitive answer as to who is right. But the initial reaction of the markets seemed to be that they had more trust in the short-seller — a company whose Web site gives no address — than in the auditor’s opinion.

The shares, traded in Toronto, lost more than 70 percent of their value in two days, shaving $3 billion off its valuation. Bond prices also plunged. Prices had to fall sharply before speculators could be found who were willing to bet that the financial statements really did, in the boilerplate words of the auditor’s letter, “present fairly, in all material respects, the financial position of Sino-Forest Corporation.”

If there was a fraud, there is no doubt that Ernst & Young will be sued, and there is even less doubt that it will deny responsibility. After all, its letter did make clear that management was responsible for the internal controls needed to assure the statements are “free from material misstatement, whether due to fraud or error.”

To the auditing industry, the fact that investors tend to blame auditors when frauds go undetected reflects unrealistic expectations, not bad work by the auditors. The rules say auditors are supposed to have a “healthy degree of skepticism,” but not to detect all frauds.

“There is a significant expectations gap between what various stakeholders believe auditors do or should do in detecting fraud, and what audit networks are actually capable of doing, at the prices that companies or investors are willing to pay for audits,” stated a position paper issued in 2006 by the chief executives of the six largest audit networks.

Note that last part. They suggested that if investors were really worried about fraud, they should consider paying more for a “forensic audit” that would have a better — but not guaranteed — chance of spotting fraud. Don’t like our work? Pay us more.

There is no doubt that some companies are easier to audit than others, and that Sino-Forest falls on the harder side. While it has headquarters in Toronto and Hong Kong, its operations are — or at least are claimed to be — spread out over much of China. The company says it manages nearly two million acres in forest plantations across China. Muddy Waters says that is a lie, and that its actual operations are much smaller.

Investors trying to decide whether to believe the Muddy Waters report, with its detailed assertion that the company’s claims are contradicted by Chinese records, would love to know just what Ernst did to check. What records did it inspect? Which tree plantations did it visit? Who did the work? Was it people from Ernst’s Toronto office, which signed the report, or people from a Chinese affiliate? How many auditors did the work, over what period of time?

Ernst’s audit opinion does not say, which is no surprise. Virtually every audit opinion in the world says almost the same thing, with no details about the company being audited. Auditors are paid millions of dollars to produce a report that no one thinks is worth reading.

On June 21, the Public Company Accounting Oversight Board, which regulates auditors in the United States, plans to ask for public comments on whether to require auditors to do more and say more.

One idea the board is expected to consider is requiring auditors to disclose more about what they did, and did not, do. Ideally, auditors would point to things that they could not audit. There are a lot of them now, and sometimes they are crucial.

“The foundation” of the Sino-Forest fraud, stated the Muddy Waters report, “is its convoluted structure whereby it runs much of its revenues through ‘authorized intermediaries.’ ” Those organizations supposedly process tax payments owed to China on wood production, the report said, thereby assuring the company “leaves its auditors far less of a paper trail.”

Auditors could be called upon to specify where they thought fraud was most likely in a given company or industry, and what they did to confront the risk. Investors could have a chance then of comparing the work of differing audit firms, as one firm disclosed it had checked something other auditors did not mention.

If an audit was expected to call attention to possibly critical information that was not available to the auditors, perhaps there might be pressure from investors on companies to make that information available. In any case, investors could better understand what the auditors knew — and did not know — in reaching their conclusions.

The problems with audits now go well beyond questions of fraud. A critical element for many banks is the valuation of securities that trade infrequently, if at all. There may be a wide range of possible estimates, and the auditor now must simply conclude the estimates are within that range. If so, it signs off.

To make things worse, the estimates may have come not from the company being audited, whose work the auditor can examine, but from a pricing service that views its models as proprietary, making them virtually impossible to audit. That fact is something investors should know, but now do not.

Nor do auditors disclose information about how reasonable an estimate is. In some cases, a wide range might be defensible, and investors have no way to know whether a company was particularly conservative or aggressive in its estimates. The oversight board may consider asking that companies disclose what they deem to be the range of reasonable estimates, and why they chose the one they did. Then the auditors could comment on that.

If auditors enforced some consistency on ranges, then financial statements of different companies might be more comparable, even though they chose different estimates.

The accounting oversight board is also expected to ask if it is time to end the “one grade fits all” audit model, in which every company is deemed to “fairly” present its results. Perhaps a second grade could be added, like “presents adequately,” for companies that push the envelope but do not violate the rules.

In addition, auditors could be called upon to discuss the risks the company was taking. They could also be asked to call attention to some of the most critical disclosures in the footnotes, something that French auditors already do.

If much of that happened, audit opinions could become a lot more interesting to read. Investors might actually learn something, and they might be able to form opinions about differences in audit firms.

Another long-overdue change would be to have the lead partner on an audit sign the opinion in the annual report. Now, the firm signs, and investors have no way of knowing who was responsible. If an audit signed by a certain partner later blew up, that could be devastating to his or her career if investors shied away from any companies whose audits he later signed. Would that make auditors more careful? Perhaps.

This week, as the controversy over Sino-Forest raged, Canadian regulators began an investigation and the company indignantly defended itself. “I have spent 17 years building Sino-Forest and I can promise investors we are not guilty of the charges levied against us,” said Allen Chan, the chairman. “Our financial statements have been audited by Ernst & Young a leading international audit firm….”

Its board appointed a special committee of three directors, all Canadians who served on the company’s audit committee and including a former Ernst partner, to investigate. The committee hired PricewaterhouseCoopers, another member of the Big Four.

Investors seemed confused. After the plunge of last week, the shares bounced around on extremely heavy volume this week. They rose a bit on Thursday to 5.15 Canadian dollars ($5.26), but were still down 72 percent from the price of 18.21 Canadian dollars just before the charges were aired last week.

Moody’s said it will review its ratings and “seek to assess the veracity of the claims” made by Muddy Waters. It gave details of what it would check.

But Ernst was mute, unwilling to either defend its work or discuss how it had reached its now-questioned conclusion that the financial statements “present fairly” the company’s condition. Investors who relied on the audit will just have to wait.

“It would be inappropriate to make any comment while the work of the special committee is ongoing,” said Amanda Olliver, a spokeswoman for the audit firm in Toronto. “In any event,” she added, “our professional obligations prevent us from speaking about client matters.”

Economy is Still Choking on Housing — When Will Obama Act?

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EDITOR’S NOTE: I am tired of reading about how economists express surprise at the sluggish economy. The same goes for when they express hope at slightest uptick in any index that is followed, none of which are real representations of economic activity. As the recent new York Times Editorial stated, as housing goes, so goes the economy. Housing is corrupted by the ongoing fraud being perpetrated by Wall Street. We have fraudulent loans compounded by fraudulent foreclosures, covered over with the appearance of having modification and short-sale programs that fall short of any reasonable expectations. We have a synthetic inventory of homes for sale or in the pipeline that are said to be owned by the banks but legally are still owned by the homeowners who were victims of fraudulent lending, fraudulent foreclosures, fraudulent auctions and other violations of statutory and common law.

The solution lies in housing and being honest about it, going on the facts and getting rid of ideology that creates the myth of a false moral dilemma. Pull back the curtain, let the facts roll in and apply existing law. Stop assuming that the obligation is in default just because some third party comes in and says so. Stop assuming that the obligation still exists.

  • Stop assuming that the payments weren’t being made to the investor -lender even as the forecloser declared a default.
  • Just because the homeowner-borrower didn’t make a payment doesn’t mean the payment was due and doesn’t mean that the payment was not received by the creditor.
  • Stop assuming that the foreclosure paperwork is just a snafu and take it for what it is — intentional fabrication and forgery in support of a fraudulent scheme for the banks to get a free house damaging both the investors who put up money and the borrowers who put up their homes.
  • And stop assuming that just because a bank shows up through counsel that they are entitled to buy the property at auction without paying any money and without being the actual creditor; their credit bid is a nullity.

Stop throwing people out of their homes without any evidence that it is legally right and proper to do so. And restore people to their homes with whatever equity is left in the home after Wall Street has trashed the housing market and took down the economy with it. You want an economic recovery? Give the homes back to their real owners and make any would-be forecloser prove their case with real evidence. You’ll end up with virtually no foreclosures and an economy in which the middle class wealth has been restored to the tune of trillions of dollars, without a penny coming out of the treasury from taxpayer money. Now that is a stimulus I can live with.

The Economy Is Wavering. Does Washington Notice?

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The latest economic numbers have not been good. Jobless claims rose last week, the Labor Department said on Thursday. Another report showed that economic growth at the start of the year was no faster than the Commerce Department initially reported — “a real surprise,” said Ian Shepherdson of High Frequency Economics.

Perhaps the most worrisome number was the one Macroeconomic Advisers released on Wednesday. That firm tries to estimate the growth rate of the current quarter in real time, and it now says annualized second-quarter growth is running at only 2.8 percent, up from 1.8 percent in the first quarter. Not so long ago, the firm’s economists thought second-quarter growth would be almost 4 percent.

An economy that is growing this slowly will not add jobs quickly. For the next couple of months, employment growth could slow from about 230,000 recently to something like 150,000 jobs a month, only slightly faster than normal population growth. That is certainly not fast enough to make a big dent in the still huge number of unemployed people.

Are any policy makers paying attention?

When the economy weakened in the first quarter, Ben S. Bernanke, the Federal Reserve chairman, and Obama administration officials said the slowdown was just a blip and growth would soon pick up. Today, many Wall Street economists are saying much the same thing: any day now, things will improve.

Maybe they will. But the history of financial crises shows that they produce weak, uneven recoveries, with unemployment remaining high for years. That history also shows that aggressive government action — the kind of action Washington took in 2008 and 2009, but not for most of 2010 — can make the situation much better than it otherwise would be.

The latest signs of weakness suggest that policy makers remain too sanguine. It is easy to see how the rest of 2011 could end up disappointing, much as 2010 did.

For one thing, there are specific forces holding back growth. Oil prices, though down in the last few weeks, are still 40 percent higher than a year ago and continue to siphon money away from the American economy to overseas economies. When I filled my gas tank last weekend, it cost $74, more than I think I have ever paid.

The housing market also remains in terrible shape. Europe is still struggling with its debt troubles. State and local governments continue to cut jobs.

These specific problems worsen the broader insecurity of both households and business executives — insecurity that is typical in the wake of a financial crisis. Long after the crisis itself is over, businesses are slow to hire and quick to fire. Thursday’s report on new jobless claims showed that they rose by 10,000, to 424,000, which is not a number associated with a solid recovery.

“Labor market gains may be faltering somewhat,” Joshua Shapiro, chief United States economist at MFR, a New York research firm, wrote to clients after the report’s release.

For households, already coping with miserly wage growth, that is another reason not to spend. The Commerce Department’s updated gross domestic product figures showed that consumer spending grew at an annual inflation-adjusted rate of only 2.2 percent in the first quarter, not the 2.7 percent rate the department initially reported.

The economy does still have some bright spots, and they could grow in coming months, just as policy makers and private forecasters are, once again, predicting. If North Africa and the Middle East do not become more chaotic, oil prices may continue falling. Vehicle production will probably pick up as the parts shortages caused by the Japanese earthquake end. The falling dollar will continue to help American exporters, as well as any domestic businesses that compete with foreign importers.

But there is no doubt that the economy has performed considerably worse in the last few months than most policy makers expected. The situation is now uncomfortably similar to last year’s, when the economy sped up in the first few months only to stall in the spring and summer.

The most sensible response for Washington would be to begin thinking more seriously about taking out an insurance policy on the recovery. The Fed could stop worrying so much about inflation, which remains historically low, and look at how else it might encourage spending. As Mr. Bernanke has said before, the Fed “retains considerable power” to lift growth.

The White House and Congress, meanwhile, could begin talking about extending last year’s temporary extension of business tax credits, household tax cuts and jobless benefits beyond Dec. 31. It would be easy enough to pair such an extension with longer-term deficit reduction.

Any temporary measures will eventually need to lapse, of course. But the current moment remains a textbook time to use them — when the economy is struggling to emerge from the aftermath of a terrible recession. The one thing not to do is to turn to deficit reduction too quickly after a crisis, as Europe is painfully learning.

Almost four years after the mortgage market first began to quiver and unemployment began to rise, Americans are understandably eager for good economic news. But wishing for it doesn’t make it so. You have to wonder whether the people in Washington have learned that lesson yet.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

NY Times Editorial: As Housing Goes, So Goes the Economy

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EDITOR’S NOTE: Where were they three years ago? Well it is still a good thing that the lead editorial connects the dots. The housing market is continuing to decline and it will continue as long as we regard the foreclosures as having any color of legitimacy. For decades housing has been the bell-weather of our economy, the driving force for jobs and innovation. This farce, wherein the banks are pretending to have securitized loans to cover up simple theft of historically huge sums of money draining the life out of the economy, must end or we are condemned to servitude with the Banks as our Masters.

NY Times editorial May 25, 2011:

The Great Recession began with the bursting of the housing bubble. Today, nearly two years after the recession officially ended, the housing market is still in trouble.

At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.

Even a recent drop in foreclosure filings isn’t a reason for optimism. April was the seventh straight decline in monthly filings — which include notices of default, auction and bank repossessions — according to RealtyTrac, a real estate data provider. But the decline appears to be largely the result of banks slowing the foreclosure process in order to keep properties off the market until prices recover. The catch is that prices are unlikely to recover as long as millions of foreclosures are imminent.

This isn’t just bad news for homeowners. Selling and building of houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling home equity dents consumer confidence, making things even worse.

Since the problems in housing are not self-curing, a government fix is in order. But the Obama administration’s main antiforeclosure effort has fallen far short of its goal to modify three million to four million troubled loans.

Its basic flaw is that participation by the banks is voluntary. Most have joined the program but face no real pressure to meet its goals. Another big problem is that banks often do not own the troubled loans; rather, they service the loans for investors who own them. As servicers — in charge of collecting payments and managing defaults — banks can make more from fees and charges on defaulted loans than on modifications. Not surprisingly, defaults proceed and modifications lag. Banks win. Homeowners and investors lose. The economy suffers.

That does not have to be the end of the story. In a recent hearing in a Senate banking subcommittee, witnesses proposed new laws and regulations to change loan-servicing standards in ways that would prevent banks from putting their interests above those of everyone else.

For starters, various government guidelines on loan servicing would be replaced with tough national standards. Among the new rules, homeowners would be evaluated for loan modifications before any foreclosure — or foreclosure-related fee — is initiated. The bank analysis used to approve or reject modifications would be standardized and public, and failure by the bank to offer a modification when the analysis indicates one is warranted would be grounds for blocking any attempt to foreclose.

National servicing standards could succeed where antiforeclosure programs have failed, namely, in compelling banks to help clean up the mess they did so much to create.

In the Senate, Democrats Jack Reed and Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio have introduced bills to establish standards. The new Consumer Financial Protection Bureau can also impose servicing rules. The Obama administration should champion national standards, and Congress and regulators should act — soon.

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