Though it focusses on the US experience the underlying mechanics are pretty much the same for Europe.

MORTGAGE FRAUD REVISITED: Why Did the Fed Pump and Dump US Real Estate Markets?

My colleague, Bill Black, has been entertaining himself by reading through the transcripts of the Fed’s meetings to find discussions of mortgage fraud. As you probably know, Congressman Henry Gonzalez forced the Fed to release these transcripts after he caught Chairman Greenspan in a white lie. Well, maybe it was not so white—just an outright lie trying to claim that transcripts of Fed meetings did not exist. We now know they did. Greenspan then agreed to release them, with a five-year lag. So, joy of joys, you can now read the transcripts from FOMC meetings for 2006, right at the end of the biggest real estate boom in human history. And Bill Black is just the sort of guy who would find this fun.

I did the same thing for the period surrounding 1993-94 (back when Greenspan was caught in making those untruthful statements to Congress—never a good idea since Congress can throw the liar in prison). It is actually more fun than you might think. Go read the transcripts from the secret conference phone call when the Maestro informed his fellow FOMC members not only that he had misled Congress, but also that every word they had ever uttered at his FOMC meetings had been taped, as in Watergate secret taping. The gasps are still audible after all these years. But forget all that, let us turn to mortgage fraud in the 2000s.

Many of those involved in promoting the fraud have claimed that “no one could have seen it coming”—meaning the collapse. This is, of course, implausible. The FBI had warned of “an epidemic of fraud” back in 2004—long before the worst abuses became normal bank practice. And from the Fed’s transcripts, there is no doubt at all that the Fed “saw it coming”. Let’s look at a particular report from December 12, 2006. Don’t take my word for it. Read this: http://www.federalreserve.gov/monetarypolicy/files/FOMC20061212meeting.pdf

Here is a relevant portion of the transcript, with a bit of added bold:

MS. BIES. As many of you have noticed, some of us are optimistic that we may be approaching a bottom in the housing market…. The growth in mortgage credit has slowed significantly from where it was in the past two years, dropping to only 10 percent growth this past quarter, a growth rate that is significantly above the growth of personal income and that most of us in the past would have considered to be alarming. Part of what’s amazing in all of this is that in 2004 and 2006, particularly toward the end of that period, purchase money seconds, by which people borrowed the down-payment for homes, were a big part of mortgage financing… The one sector that has had a jump in delinquencies is subprime ARMs, and clearly the jump is related to rates that have already reset. We’ve got more to come. One thing I’m hearing more from some folks who have been investing in mortgage-backed securities and maybe in some CDOs (collateralized debt obligations), where they’ve been tranched into riskier positions through economic leverage, is the realization that a lot of the private mortgages that have been securitized during the past few years really do have much more risk than the investors have been focusing on… We’re seeing that some of the private-label mortgage-backed securities are having very high early default rates or delinquencies in the mortgages, which usually means that the originator has to buy them back out of the pools. There isn’t a whole lot of transparency in the disclosures around some of these bonds, and some of the brokers are underwriting products that have very high early default rates, which is something that investors are starting to focus on. As more products are generated outside the banking sector, they get funneled to pools through broker-dealers as opposed to the banks. I think that we’re missing a level of due diligence regarding brokers, who may not be doing a good job. As you all know, the fraud rate on mortgages has tripled in the past two years. So I think we could see noise in some of the mortgage-backed private deals and some of the riskier CDO economic leverage positions…. Loan-loss provision continues to be the best in many, many years.

Let’s translate some of this. Governor Bies recognized that:

a)      Homebuyers were borrowing their down payments. Geez, do you think it might be a wee bit risky if a home buyer puts in none of her own money?

b)      The Fed’s position is that 2006 will be the bottom of the real estate market. The bottom? The biggest real estate boom in human history, and that is the bottom? Hey, folks, the bottom might be reached in 2015, after real estate prices have fallen by at least 50% and perhaps $10 trillion of real estate wealth has been wiped out! (Already they’ve fallen by 33%, $7 trillion of household wealth was lost, and 12 million homeowners are underwater in their mortgages.)

c)       Subprime adjustable rate mortgage delinquencies are up in 2006. Who wuddav thought? You mean that making NINJA loans might be a tiny bit risky? Oh, come on—why would anyone need income, a job, or assets in order to service mortgage debt. And since the Fed began raising interest rates back in 2004, who wuddav thought this might actually hurt owners who had floating rate mortgages that would adjust upward by 10 percentage points or more? Well, the Fed certainly understood this, as Bies helpfully said “we’ve got more (delinquencies) to come”! Yes, dear, lots of them.

d)      Early defaults are spiking already in 2006. Let me explain: by late 2006 and early 2007 we got the news that increasing numbers of homebuyers were defaulting on their very first mortgage payment! Indeed, that is what led me to start warning in spring of 2007 that the whole kit and caboodle was going to blow. And now we know the Fed knew that too. Look, if a buyer defaults on the first payment there is no doubt whatsoever that the loan was fraudulent. Either the lender had duped the borrower, or (less commonly) the borrower had duped the lender.

e)      She warned there isn’t any underwriting or transparency in the whole damned mortgage finance food chain. That, of course, is a recipe for fraud. Lender’s fraud. Securities fraud. Appraisal fraud. Accounting fraud. The Fed knew all this in 2006.

f)       And, well, yes, mortgage fraud has tripled, “as you all know”. Yes, all members of the FOMC knew fraud had tripled. It’s an incredible understatement, but still a significant acknowledgment.

g)      And yet, isn’t it great news that banks have reduced their loan loss reserves? Their protection against losses due to declining underwriting standards, elimination of down payments as borrowers simply borrowed them, and outright documented fraud? Oh yes, banks don’t need no loan loss reserves now. We’ve got the Great Moderation. What could possibly go wrong?

There is no doubt at all that the Fed knew fraud was rampant and rising. There is no doubt at all that the Fed knew underwriting standards had collapsed. The Fed knew delinquencies had risen and would continue to rise. And they knew banks were reducing loan loss reserves—in order to book fake profits and to pay bonuses to top management.

And what did the Fed do about all this? The Fed sent representatives all around the country to argue that fundamentals were sound, that real estate markets had bottomed, and that the future looked bright ahead.

Did the Fed at any time ever tighten up mortgage lending standards? No. Did it ever publicly warn of a real estate bubble? No—only privately. Did it ever worry in public that we were set for the biggest real estate crash the US had ever seen? Of course not. That would have been counter-agenda.

At the time we could not get the transcripts—since they are released with a five-year lag. So all we got was cheerleading for fraud by Fed officials.

Why? Because the Fed had become the government’s main tool for pumping bubbles. There was nothing else up the sleeve; it was all there was so far as a government strategy for growth. It was the tried and true method developed under President Clinton. And it worked. Until it didn’t. And won’t any more.

Unfortunately, neither President Obama nor the likely Republican candidate, ex-governor Romney have anything up their sleeves, either.

And the US economy will not recover until housing recovers. And housing will not recover until the Banksters are shut down. Because they’ve got all the dogs in the hunt—they cannot recognize the real estate losses because their exposure is too big.

It’s the biggest Catch 22 the world has ever seen. The big banks must be resolved—shut down—to relieve the pressure on homeowners, but that cannot happen because the big banks are too big to be shut down.

Dodd-Frank changed none of that. Indeed, it strives to keep the frauds running.

This was reposted from the excellent Economonitor Blog which I wholeheartedly recommend here

It all went like clockwork. Afterwards we camped in the house and had a BBQ with a few friends. Still don’t have electricity so still a few adventures ahead.
Many thanks for all your help and hard work.

Best wishes
M

• Your underlying financial position.
• Your time horizon.

The global economic policy agenda appears to be to allow the value of most global debt to be run down over a number of years through inflation generating policies. This is less politically damaging to the politicians, who can claim that the financial pain we all feel is not a result of their policies but of “inflation”: most voters don’t seem to get the idea that today’s policy causes tomorrow’s inflation. For example, look at the UK – inflation has been running at around 5% for some time and the currency has depreciated by around 20%, so import costs have inflated by 20%.

If these policies continue, and they probably will continue for a number of years, then borrowing money to invest in long-term inflation resistant assets such property is probably a one way bet. The asset purchased will increase in value along with the movement of inflation but the value of the debt will fall. Due to the magic of compounding, after 20 years inflation at 10% per year (and ignoring interest payments for simplicity) an asset purchased for €100,000 grows to be worth around €600,000 whilst the debt of €100,000 incurred to buy it falls in real terms to around €13,000 to repay – a magnificent profit in real terms.

If you correspond to a banks prudent banking profile category 1 or 2 (see previous post) you’ll have no difficulty borrowing, even in today’s financial climate.

If you investment horizon is long-term then you should make a very solid gain from just the inflation effect alone.

Under the doctrine of “prudent banking” potential borrowers are classed into one of four categories:

1. Borrowers who could immediately repay all capital and interest outstanding.
2. Borrowers who could make all capital repayments as they fall due along with all interest as it is accrued.
3. Borrowers who could pay all interest as it is accrued but could not make repayments of capital without refinancing the loan.
4. Borrowers who could not make repayments on capital and who would need to borrow in order to meed interest payments as they fall due.

Category 1 borrowers will have no difficulty borrowing provided they can prove their underlying asset position to the bank’s satisfaction.

Category 2 borrowers will be able to borrow within the bank’s lending policies provided they can prove themselves to be capable of servicing their debt without financial strain.

Category 3 borrowers will be largely excluded from the mortgage market.

Category 4 borrowers will be excluded from all borrowing from first tier lenders.

The implications of this are that:

• The loan to value conditions will be likely to remain tight, typically between 70% to 80% LTV.
• Interest only loans will only be available to category 1 and 2 borrowers.
• Equity release loans will only be available to category 1 borrowers.
• The bank valuation of property, especially marginal property, will become more conservative and cautious and banks may effectively withdraw from some geographic locations.
• Banks will not accept borrowing applications where the effect of the borrowing would transfer the det to their balance sheet from a 3rd party.

In short, only financially sound borrowers will be able to borrow – the days of the NINJA loans (no income, no job and no assets) which wrecked the US housing market are over for the forseeable future

The answer is that for the whole of the last economic cycle too much money has been borrowed and now the borrowers can’t repay the loans.

Most of the near half trillion euros of three-year funds borrowed from the European Central Bank in the last week of 2011 have made their way back to the ECB’s overnight deposit account.

The first 36 months long-term refinancing operation, in which banks took €490 billion in total, has so far not worked as planned because the extra liquidity has simply been placed on the deposit facility at the ECB.

The sharp increase in outstanding open market operations increases excess liquidity (defined as open market operations plus recourse to the marginal lending facility minus autonomous liquidity factors minus reserve requirements) and this excess liquidity shows up as deposits at the ECB in just the same way as it did in 2008-10.

The flip side of this is that most of the liquidity taken up by banks go straight back to the ECB at the deposit facility which is now standing higher than at any time between 2008 and 2010.

In short the banks are absorbing as much money as they can find to shore up their balance sheets but they are not prepared to take any lending risks so they are not lending to each other and they are not lending to mortgage borrowers if they see the slightest risk.

• Belgian mortgages.
• Italian mortgages.
• Portuguese mortgages.
• Spanish Mortgages.
• Turkish mortgages.

In fact mortgages worldwide are being hit by the same economic realities.

The current situation especially affects those who want to take the following mortgage products:

• French equity release mortgages.
• French interest only mortgages.
• French high loan to value (LTV) mortgages.

Though every case is different, there is a very clear pattern to the banks’ responses and it’s a pattern that results from the global economic situation and the four economic policies that are being pursued by governments over most of the world.

• Firstly, there is de-leveraging – the policy designed to reduce overall indebtedness of governments, banks and individuals. This hurts everyone.
• Secondly, there is austerity – the policy designed to force the repayment of debt from current and future income. This hurts everyone.
• Thirdly, there is fiscal repression – the policy designed to force the costs of getting out from under the national debt mountain onto the section of the population who have savings and other assets by artificially depressing the interest paid on savings.  This hurts anyone with savings.
• Fourthly, there is inflation – the policy designed to allow the indebted borrowers to repay their debts in devalued currency. This hurts savers.

To help you understand what’s going on in bite sized chunks we have split the topic into four sections that will be published over the next four days:

• Euro mortgages – Why they are more difficult to get.
• Euro mortgages – How we got here.
• Euro mortgages – What happens next.
• Euro mortgages – Is it a good time to take a mortgage.

Thanks for all your help in sorting it all out.  I’d signed the POA at the Notaires and it was all sorted by the 30^th.

3 weeks later and I’m back in the UK wishing I was not at work and was actually still in France!

Thanks again

S

However, there are still lots of ways to get to France from UK and beyond, and if you need a cheap crossing to go house-hunting, the winter months offer some attractive prices.

If you would like an approval in principle for your French mortgage before you set sail, please contact Best French Mortgage.

We don’t charge clients any fees: no introduction fees, no administration fees, no processing fees, just no fees. Our mission is to arrange the French mortgage that helps you realise your French dream – however you get there!

We now own a house in France and feeling very excited, but daresay the journey has not ended yet!   But we wanted to thank you very much for all your help with the French mortgage, it’s been hugely appreciated.

Have a wonderful 2012

regards

J & S

Jayne is fascinated by the way the French go about life and how they celebrate events. Jayne’s says will show why she loves France. As you read what Jayne says about Frenchmen, French mesdames and France you too will become enchanted by La Vie Francaise.

In November the volume of loan dropped 0.04% compared to the previous month to €1,915.3 billion.

It is still up 5.8% on a yearly basis, but lower than the 6.5% recorded in October.

Mortgage lending was up in November in spite of deteriorating loan conditions and rating agency downgrades of some French banks.

In all the annual rate of mortgage lending has dropped to 7.8% from 8.3% in October.

The basic requirement for signing anything French is to put your signature, the date and the place where you were when you signed.

On French mortgage application forms you will frequently also be asked to put une mention (an affirmation) above your signature such as «Lu et Approuvé» (Read and Approved) or «lu et approuvé, certifié sincère et véritable» (read and approved, certified honest and true).

When an artisan sends you un devis (an estimate) you should add the mention “Bon pour accord” before your signature, date and place.

Most multiple page documents such as the Compromis de Vente should also be initialled (paraphé) on every page.

My advice? Even if your French isn’t very good yet, always look for the words “mention” and “parapher” before signing the French way.

All went well thanks, we finally own the property – although it was eventful to the very last second as the agent/translator was 15 mins late and hadn’t provided the Notaire with a copy of the home insurance – fortunately, I took all my papers with me so gave her a copy there and then - phew…..

All that remains is for me to thank you again for all of your help and to say I would definitely recommend your services to all of my friends. And of course, to wish you a very happy Xmas and New Year.

D&S

Many thanks again for all your help and I’m just confirming that we have received the offer and will post it back after the 10-day cooling off period on our return to France .

Once again a very Merry Christmas to you and happy holidays.

M & S.

This edition is available in Kindle or paperback, ideal travelling companion if you have just bought a ski chalet.

Peter Mayle and his wife did what most of us only imagine doing when they made their long-cherished dream of a life abroad a reality. They bought a glorious two hundred year-old farmhouse in the Lubéron Valley and began a new life. In a year that begins with a marathon lunch and continues with a host of gastronomic delights, they also survive the unexpected and often hilarious curiosities of rural life. From mastering the local accent and enduring invasion by bumbling builders, to discovering the finer points of boules and goat-racing, all the earthy pleasures of Provençal life are conjured up in this enchanting portrait.