An in depth analysis of WHY YOU ARE WRONG

Tuesday, March 31, 2009

FHA Defaults Exploding

This is the problem. Nobody needs to use physical force or the threat of it( which is the only power government has) to get people to do things they see as in their own interest. In all markets in which coercion is banned, buyers and sellers meet in the middle at a price in which the seller gets the best available price from buyers who see the house as a good value. All parties, from the buyer to the lender who is taking on the loan risk have the incentive to look after themselves.

Of course the judgements of the marketplace often tell us things we don't like to hear. They might say that we can only afford a two bedroom home when we want one with four, or tell us we need to save a larger downpayment or even that we might be better off renting for now.

The current crisis developed after generations of government policies worked to convince more and more people that they had to buy homes they couldn't really afford. The primary mechanism at work was one of shifting risks further and further away from the primary parties involved, usually through the government "guarantee".

No need to wonder if your bank is making sound investments with your savings--- there's an FDIC guarantee.

No need to ask about larger amounts in huge institutions--- they are probably, too big to fail

No need for the bank to examine the buyers credit--- Fannie Mae will be buying and guaranteeing the loan or Freddie or the FHA etc...

The end result is a housing market filled with a huge number of people who bought homes they couldn't afford. The solution should be equally simple; just let homes fall to a price at which buyers can afford conservative downpayments of 10-20% and payments are no more than 20-25% of income.

Of course, this solution involves telling millions of people they likely overpaid for their homes-- something they don't want to hear.

So now, the house is on fire and the goverment cleanup crew is dousing it with a heavy dose of sober accounting and lending standards-- right? Well, actually they are thinking about telling banks to lie about the value of loans on their books.

They are being honest about which banks are in trouble so depositors don't give them more money to blow? Well, actually the fed and FDIC have refused to say which institutions are in trouble or which toxic assets the government has bought or guaranteed. They have done nothing to prevent troubled institutions from luring deposits with high interest rates.

But, they have worked to oust bad managements and punish frauds? Well, at this poiint almost all major firms are under the same management.

They are at least trying to toughen loan standards right? NO!, NO!, NO! The government is in fact working like crazy to reinflate the bubble by cutting loan standards again. The main mechanism for this shift is the massive growth in FHA loans which now comprise at least a third of the market.

We know for example that buyers who put down little or nothing for the downpayment were at high risk of default. So, why is the FHA making more loans of this type?

Another major red flag is the huge percentage of downpayments made by non-profit entities which are often funneling money from the seller for a fee.

"In 2005, HUD commissioned a study entitled “An Examination of Downpayment Gift Programs Administered By Non-Profit Organizations”. Later that year, another report titled “Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance” was completed by the U.S. Government Accountability Office. Both studies concluded that seller-funded down payment assistance increased the cost of homeownership and real estate prices in addition to maintaining a substantially higher delinquency and default rate."

The results of these policies are now bearing fruit-- defaults are exploding and so is likely fraud

"In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.

If a loan “is going into default immediately, it clearly suggests impropriety and fraudulent activity,” said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA."

The default rates are shocking.

"Add the percentage of FHA loans in the foreclosure process to the total loans that are delinquent at least one month and we have a total default/delinquency rate of 15.24%. Something is clearly wrong with the FHA loan program and another major bailout of a federal lending agency seems inevitable.

Thursday, March 26, 2009

Bring Back Sound Money

The following is the full pre-prepared statement of Aaron Krowne, founder of the Mortgage Lender Implodometer in support of the Constitutional Tender Act HB 430 in Georgia. This act, would require that the state of Georgia to only accept gold and silver in payment of it's debts, fees and tax payments. Krowne and many others who predicted this crisis placed it's root cause in the lack of a sound currency backed by gold.

Georgia and all of the Civil War South was ravaged by inflation as the confederate government printed money to pay it's bills.

The Constitution of the United States recognizes sovereignty of the states in article ten of the Bill of Rights. However, the states are forbidden to make “any Thing but gold or silver Coin a Tender in Payment of Debts” in Article I section 10. The central government is given no power to make a tender at all. Furthermore, on August 16, 1787 a motion to strike out the power of Congress to “emit bills on the credit of the U. States” carried nine to two. All the discussion regarded “bills of credit” to be “paper money.” Article I section 8 of the Constitution allows Congress the power to “Coin money” which obviously concerns coins and not paper. Indeed, why would the founders grant the Congress the power to create money that the States would be forbidden from making a tender? Despite Washington DC’s ignorance and hostility to the Constitution of the United States, we in Georgia have an obligation to do our best to follow it. The Constitutional Tender Act is a good start at compliance with the Constitution.

Obviously, the founders showed great wisdom in fearing the government's ability to print up "funny money".But most politician's know better than to follow their advise or even The Constitution they were sworn to uphold. Constitution! We don't need no Constitution- it would only get in the way of people like Bernanke, Paulson, Geitner and Obama.

Aaron Krowne Testimony in Support of HB 430 - The Constitutional Tender Act

Thank you Congressmen for giving me the chance to speak in support of this important bill.

My name is Aaron Krowne. I am the co-founder and CEO of IEHI, Inc., a media company that publishes economic web sites with a primary focus on the financial crisis. While the term "financial crisis" now needs no introduction, when I started the first web site of our network at the end of 2006, to speak of anything other than the "sound fundamentals of the economy" was heresy. This was the case until well into the spring of 2008, and extended all the ways up to the president and the presidential candidates.

They were wrong, and now it is obvious we were ahead of the curve. Our first site was whimsically named the "Mortgage Lender Implode-o-Meter", and we now maintain "implode-o-meter" sites for many financial sectors, including banks. Each site was rolled out before it was widely accepted that there was a problem in the corresponding sector, as any troubles that had already manifested were believed to be "contained" -- if not intrinsically -- then by the rescue actions of the Fed and/or Treasury.

As a result, our sites have become very popular, sporting 50-100,000 visits on a typical week day. This has forced some acknowledgement by the "main stream" media, even when it would not accept our conclusions and prognostications. As such, we have been covered and cited by outlets such as the New York Times, the Economist, the Wall Street Journal, CNBC, Bloomberg, and countless others. I have also appeared from time to time on the Fox Business Network.

So how did we best most TV analysts, industry economists, Nobel Laureate academics, and political advisors in predicting there would be a crisis, and that it would spread, and that it would come to dominate (if not upend) the US and global economy?

The reason can be most succinctly expressed as "unsound money", which is what I am specifically here to talk about today.

Today in the United States today we have a de facto regime of "fiat money". This means that that our money is formally backed by nothing -- it consists merely of abstract promises. For US Treasury securities, the promises are to pay the principal plus interest, in the future, in US currency (dollars). For the currency itself, there is an implicit promise that the spending-power value of the notes will be kept roughly constant. Otherwise they would not be widely accepted. Yet, no one can actually be held accountable if this implicit promise is violated. Because of this lack of concrete value backing the money, it is more accurate to call it a "currency", as it lacks the critically-important store-of-value property of money.

This has not always -- or even usually -- been the case in history; even our own. Fiat money was permanently introduced in the United States only in 1913, when the Federal Reserve was created. Prior to this, other than briefly in times of war, US money was only in the form of gold and silver coin, or notes redeemable directly in US coin or other bullion. As far as durable value, under the Federal Reserve fiat regime, the dollar has lost more than 95% of its value. By contrast, from the founding of the republic until 1913, the dollar not only maintained but actually gained noticeably in value. So much for "promises" to maintain value. Instead, it appears the Federal Government has devalued the dollar at the maximum rate possible without threatening its own existence -- as of yet.

The founding fathers were very wary of this outcome. They had just experienced the disastrous Continental fiat money, which was inflated away to almost nothing amidst the expense of the Revolution. They also knew that distant despots could use fiat money to place into effective servitude the periphery and common citizens of a Nation, especially those who were politically the weakest. They did not want to create a new Federal Government that would assume this despotic role.

Because of this experience, and because they were learned men in general on the subject of political history, they made it explicit in the Constitution that "no State shall make any thing except Gold and Silver Coin a tender in payment of debts" (Article I, section 10). Nor could states coin their own money; the establishment of coinage standards being a responsibility explicitly assigned to the Federal Government (Article I, section 8). States could not "emit bills of credit" (Article I, section 10) -- a type of fiat money, and neither was this capability granted to the Federal government. Counterfeiting was expressly to be punished by the Congress (Article I, section 8).

So it is quite clear that the money of the United States must be only gold and silver.

Activists who would arbitrarily reshape the Constitution to suit their whims might protest that such a regime is "too restrictive" -- after all, how else could the Federal Government spend more than it takes in during times of emergency? But the Constitution does explicitly permit the United States to borrow (Article 1, Section 8), and states that the validity of its debt shall not be questioned (Amendment 14, Section 4.) So the founding fathers provided for this need.

What we have today is a system of bills of credit and nothing else. Apologists for this system argue that it has been established by law -- Namely, the Federal Reserve Act and other law and codes establishing the Fed's emissions as legal tender. But all of this law and code is, on the face of it, unconstitutional. Pointedly, while the Constitution establishes gold and silver-only money and provides for Federal borrowing, it does NOT permit that borrowing to become the foundation for the money itself. Yet today the Federal Reserve is little more than a machine to do exactly that: "monetize" Federal debt -- and even the debt of banks and non-bank private financial companies -- by creating money out of thin air with which to purchase it.

HB 430 simply provides for a return to the original Constitutional requirements, which still remain in place.

Critics will doubtless argue that things have "worked fine" since 1913 on a pure-fiat money basis, so why change now?

There are two main responses to that.

The first is that this regime of "pure fiat" is actually relatively recent. While it is true the Federal Reserve was established in 1913 and almost immediately began emitting paper money, gold and silver money were not immediately withdrawn. Gold and silver United States Notes circulated along side Federal Reserve Notes for decades after the founding of the Fed. It wasn't until 1933 that gold ownership was (unconstitutionally) outlawed for US citizens, and gold coins and Gold Certificates were withdrawn. However, silver and silver notes remained in circulation. In fact, until 1957, Silver Certificates continued to be issued. These notes were of the "exists on deposit at the Treasury" variety, an even stronger backing than being merely "redeemable" in a certain quantity of metal. Accordingly, when the Treasury's silver ran out, it stopped issuing the notes. As the price of silver rose, the notes disappeared from circulation.

However, even this was not the end of "real money" in the United States: US coin, all the way down to dimes, continued to be 90% silver until 1964. Silver certificates continued to be redeemable in silver all until 1968.

That, still, was not quite the end: throughout all of this, the US dollar continued to have an "international" gold backing -- it was redeemable in gold at a fixed rate under the post-WWII Bretton Woods agreement. The gold backing was maintained to instill global confidence in the US dollar amongst the nations of the world; indeed, Bretton Woods would never have gotten off the ground without it.

However, the United States had been expanding money supply so rapidly over the ensuing decades that it eventually became obvious to our foreign trading partners that there was not enough gold to cover the promises implicit in all the dollars that had been issued. The Treasury was accordingly drained of gold, until in 1971, president Richard Nixon unilaterally "closed the gold window" and stopped gold payments. This effectively ended the Bretton Woods system, and thrust the world into a "floating exchange" regime. It was only then that pure fiat money became the system of the United States, and became the rule rather than the exception worldwide.

It is clear from the above timeline what really happened: a sound backing for US money was not removed all at once, but was done so quite gradually, over almost sixty years. The public was thus duped. We were boiled slowly, and like the proverbial frog, did not hop out of our pot as it sat on the fire. Indeed, by the 1970s, most people did not even know what was being removed when the Bretton Woods gold backing was abrogated.

Thus, until 1971, one could argue on a legally-viable (though mootable) basis that state debts, payable in lawful money, also satisfied equivalently the gold and silver clause of the Constitution. In sum, the pure fiat regime can be seen as quite recent -- within living memory of most of our lawmakers today.

The second response to the claim that "our fiat system has been working fine" is that it simply has not been. Putting aside for a moment the issue of the gradual erosion in purchasing power of the dollar, a monetary system based on limitless expansion of credit has been a complete disaster. This is what my web sites are fundamentally about: without the discipline of a monetary connection to a fixed commodity like gold or silver, money becomes mere credit, and credit expands as fast as it can. This induces a bubble, to which very few protest because it is easier to participate in the bubble than to oppose it. For a while, many people make lots of money on leveraged speculation. Even politicians and bureaucrats cannot be trusted to exercise restraint; indeed, they thrive on, the increased tax revenues and public approval of the economic "boom". However, not being based on fundamentally-wise investment, it all comes to an end soon enough, resulting in extreme leveraged losses, bankruptcies, unemployment, a collapse in tax revenues, and expensive public bailouts. It is only then that the bubble activities are generally seen to have been a mis-allocation of vast quantities of human and financial capital.

Far from an "enlightened" regime of stability, there have been many such bubbles since the founding of the Fed and the institution of fiat money: the 1920s stock bubble and 1929 crash; the S&L bubble of the late 80s until 1990; the NASDAQ bubble of the late 1990s and crash in 2000; and finally (and likely terminally), the housing bubble of 2003-2007. There also have been other significant phases of instability and depression, such as the 1970s to early 80s stagflation (caused by excessive government expenditures and money printing), and the 1987 stock market crash (caused by the "portfolio insurance" scheme, itself a response to unhinged financial markets). In 1998 the financial system almost blew up when a hedge fund called Long Term Capital, which was levered by 100:1 or more, collapsed; inducing billions in losses for its creditors. Fed Chairman Alan Greenspan orchestrated the private bailout. However, instead of responding by returning to sound money, or at least emulating it with meaningful restrictions on leverage, the same imprudence was expanded to the entire banking system over the next decade, with the Fed's gleeful approval.

At the root of all of these problems is our "bills of credit" fiat money system, and concomitant unrestrained government spending and private speculation. Such a system, illegally, and to our proven detriment, remains the foundation of our monetary and banking system. Unfortunately, Federal authorities today are scrambling in vain to prop up this exhausted, unworkable system, at all of our expense.

HB 430 allows Georgia to lead the way for our country in upholding the rule of law and restoring monetary stability in the intended Constitutional fashion. It is only upon such a sound money basis that sustainable prosperity can once again take root in America.

Thank you.

How Crooks Played HUD In Albany And Other Cities

After watching that Soprano's episode, I looked around for info about HUD loan frauds in urban areas. This article that focuses on fraudulent operators in Albany, touches on the main ingredients of some typical scams. I'm hardly, an expert on this, but it seems that the key factor at work is the HUD loan guarantees themselves, which create situations in which few people have an interest in policing loan quality. They have little or none of their money at risk. In come the crooks who know a honey pot when they see it.

"AMI, which was purchased by Wachovia Bank in late 2003, specializes in originating and servicing multi-family mortgage financing. Through Fannie Mae (a government sponsored enterprise active on the secondary mortgage market) and its Delegated Underwriting and Servicing program, as well as through the insured lending program of the Federal Housing Administration (FHA). The FHA is a sub agency of HUD. The AMI loans given Aaron Dare and Emerge were FHA insured. As in, covered by taxpayers."

"The mortgage frauds to which Dare confessed utilized straw buyers, recruited by Dare's unidentified conspirator. Supposedly, some were street criminals. Straw buyers are low on the ladder of mortgage fraud. A white collar crime which according to the FBI, has become epidemic. Mortgage fraud is typically committed by rings of real estate professionals. At times involving collusion as high up as the lending level. Even when collusion isn't a factor, the immense profits which flow from the sale of mortgage loans (including high interest and fee rich subprime loans) on the secondary investment market have made some lenders sloppy about underwriting practices."

A common form of mortgage fraud is "flipping". Not all flipping is illegal. In the fraudulent variety, straw buyers are supplied with fake proof of employment and finances by collusive realtors, mortgage brokers, sellers, etc. The straw folk take out mortgage loans they have no intention of repaying. The properties they "buy" have often been acquired cheap by the sellers, who inflate the value of the properties via cooked appraisals. Sometimes by as much as 500%. Hence the loans straw buyers receive are for much more than the properties are worth. Everyone in the ring takes their cut and walks away. The loan goes into default. While momentarily goosing property values (and eventually, local property taxes) mortgage fraud and its aftermath ends up speeding neighborhood decline and depressing values. In troubled or borderline neighborhoods, where mortgage fraud is most prevalent, taxpayers frequently pick up the tag.

In the mortgage frauds perped by Aaron Dare and his unnamed conspirator, the lenders were BNC Mortgage and Fremont Investment and Loan. Both based in California, both highly active national subprime lenders. BNC is a subsidiary of Lehman Brothers Bancorp. Both BNC and Fremont have had other bad experiences in New York State. In 2005, both were defrauded in a Nassau County case involving properties in that county and in Brooklyn. And Fremont, along with several other mortgage lenders, was recently utilized by a ring made up of overlapping groups of real estate professionals from upstate and downstate New York and northern New Jersey. This ring (the Sandella Ring) targeted Suffolk County and wide swaths of Brooklyn. Its most notorious member was Emmanuel "Toto" Constant. Formerly of Haiti."

Like in Soprano's episode, often phony or corrupt non profit housing and development agencies provide cover for the crooks.

"As the Urban League was imploding, Aaron Dare was established a string of state registered real estate entities. Many with "emerge" in their titles. There was Emerge Real Properties LLC, Emerge Construction, Emerge Historic Residential Community, I, II, and III. This time Dare's target was Albany's south side. In early 2001, Dare and Emerge bought 39 residential buildings, covering blocks of a downtown nabe called The Pastures, aka Historic Pastures. Dare also bought a brewery that had been converted into residences, plus a similarly converted schoolhouse in nearby Schenectady. All were designated "historic". Hence eligible for state and federal tax credits. Dare bought the properties with close to $8 million in loans from AMI Capital Inc., a Maryland based mortgage lender. AMI in turn, funded the loans via a warehouse lender in Columbus, Ohio"

Wednesday, March 25, 2009

Hillary Clinton Admits That U.S. Drug Demand Is Destroying Mexico

The dramatic slide Mexico has taken toward total chaos has been fuelled by the America's vast demand for drugs. Violence has exploded accross Mexico as an already weak and corrupt state has been almost taken over by Narotics trafficers flush from a profit stream pumped up by our drug laws.

Rarely, if ever have American politicians claimed any responsibility-- untill now. It was never our fault.

"I feel very strongly we have a co-responsibility,

Our insatiable demand for illegal drugs fuels the drug trade," she said. "Our inability to prevent weapons from being illegally smuggled across the border to arm these criminals causes the deaths of police officers, soldiers and civilians.

Clearly, what we have been doing has not worked and it is unfair for our incapacity ... to be creating a situation where people are holding the Mexican government and people responsible," Clinton said. "That's not right."

Your damn right about that Hillary. We really can't know in the short or even long run how to stop American's from desiring many harmfull and potentially deadly drugs. But, almost every honest person with a slim awarenes of economic laws and the history of black markets would know that making these drugs legal would eliminate the cash stream that drives this violence. Our own experience with prohibition should have been lesson enough.

Tuesday, March 24, 2009

Geithner: The Voice Of Arrogance

OK, a few minutes ago there was a video up of Geitner's testamony before congress about his latest plan.

He was asked by Rep, Gresham Berrett, if he had any backup plan to fall on if this scheme should fail.

He replied that the plan basically couldn't fail and that all that was required was to have "faith and confidence" and keep on pushing. Does anyone around here see parallels to George Bush's policy in Iraq or the early days of the Vietnam War?

The general gist of his statement is that now the government has all these powers, to tax, spend, guarantee assets, print money and lie at will. It has powers that transend the constitution and market forces so nothing can go wrong.

However, even Geitner's boss, Obama admitted that there was a limit to what the treasury could spend. John Galt is watching.

Geithner Toxic Asset Plan Built On Lies

Previous plans cooked up by both the Bush Obama administrations, were built on a foundation of opacity and deception, so it should surprise few that the latest trillion dollar plan gives us more of the same-- on steroids.

Suppose for example, a patient came in to a doctor after having extreme nausea, dizziness, fainting spells and other scary symptoms. Do they have a deadly or terminal disease, or perhaps they were poisoned? It's pretty clear that the patient wants to hear that it's nothing serious.

The collapse of the complex ABS markets was one of the most serious symptoms, the equivalent of a major heart attack since it clogged the financial system and made future lending almost impossible. Some said it was just a temporary "panic attack" by investors with little underlying basis. After all, most of these securities had been rated AAA. All that was needed was for the government to reassure the patient until their irrational fears passed and people realised there was no problem. Securities that had traded at or near 100 cents on the dollar and now had no buyers at 40, 30 or 25, couldn't really be suddenly worth so little. This is of course what the patient and the doctor want to think, because if they were, almost every major financial institution would be insolvent. The key thing is to keep depositors, shareholders and everyone calm. They don't need to know what's going on since really it's just temporary.

The darker view was that actual default rates on the underlying mortgage, auto and credit card loans that formed the ABS had risen sharply and that there had also been a huge fall in the value of the houses and other collateral that backed them. There were also indications of massive fraud. The lack of real household savings and high consumer and corporate debt levels scared many. This meant the patient was almost fatally ill. Trillions of dollars had likely been destroyed and the patient had to go on an extreme low debt diet to rebuild their health. This, needless to say is a much less popular viewpoint with both the patient and the doctor who had been giving drugs and advise to this patient for years. If they were this sick, a lot of tough questions might be asked about the FED, corporate executives, rating agencies and others. The required fall in consumer and government spending and borrowing was not likely to be popular at all.

Shockingly, the government doctor has chosen to tell the patient that nothing is really wrong and to construct a complex web of deception to keep the current system of government and financial relationships afloat. However, at this point few people with any real money left are willing to believe this as can be seen by the major stock indexes. They suspect the doctor is a quack and are not eager to lend or invest in the private economy. They want the government to take on the risk and debt with the hope that they can at least push the problem into the future. The result is a catastrophic burden to be paid by innocent savers and future generations through high taxes and soaring inflation.

Sunday, March 22, 2009

Did Anyone At HUD Watch The Sopranos?

One of the most important skills in politics is being able to act very, very suprised at things that are under your nose. So, I am finally watching old Soprano's episodes and came accross one made in 2002 or 2003, I would guess. It lays out a pretty typical form of housing fraud, executed hundreds if not thousands of times in one variation or another.

The appearance on the show shows how awareness of these frauds had entered popular culture. Most people who wanted to know, knew about it--- except apparently the main agencies being defrauded.

Here's a good article on the subject from 2006. Of course, we know now that the probem was much bigger than stated.

Saturday, March 21, 2009

Drug War Failure Update

Hundreds of billions of tax dollars have lead to this. Phoenix now number two global kidnap capital behind Mexico City.