Monthly Archives: June 2016
“Sloppy or deliberately false journalistic accounts of the U.S. housing/mortgage crisis, like the June 27, 2016, front-page New York Times article below, are one of the key methods that has been used by mostly liberal propagandists to further the false narrative that greedy and reckless bankers caused the financial crisis. U.S. rules on foreclosures are not (and never were) the responsibility of banks or private mortgage lenders, but of each state’s laws…
…If you read the article below, its cites examples of alleged poor customer service and/or mortgage servicing errors/mistakes by some private equity firms, with the theme being that these new mortgage industry players are no better than the banks (that journalists like these previously falsely demonized). The bottom line is that mortgage lenders, whether they be banks or other private firms, are not responsible for every economic or personal difficulty that befalls a mortgage borrower. (I can’t recall where I heard it, but I recall that each year about 5% of mortgage borrowers encounter a serious issue….death, divorce, job loss, health matter, etc….that adversely affects their ability to pay their mortgage.) What they are responsible for, is to follow the legal terms of the mortgage contract (the note and deed of trust) agreed to and signed by the borrower, state foreclosure laws, and other applicable laws, and to treat all borrowers, even ones who have defaulted and are in the process of being foreclosed, with dignity and respect. I see no evidence that any lender has violated the mortgage contract or any applicable laws in this article, just like I have seen no evidence in other similar articles. In regards to treating every mortgage borrower with dignity and respect, no matter their circumstances, these journalists have found a handful of mortgage borrowers who claim to have been mistreated and maybe they were. If so, that’s wrong and bad customer service (which usually destroys a firm’s reputation and business over time), but that’s not a violation of the mortgage contract or the law. People who can’t pay their mortgage for long-periods of time, unfortunately do lose their homes eventually to foreclosure. If they don’t why would anyone pay? And if no one pays, who would lend? It is not in the mortgage lender’s and/or mortgage investors’ economic interest to foreclose (given that foreclosures usually occur when there is little to no equity in the home and given the significant costs of foreclosure) on any borrower who has a likelihood of making a reasonable (even below the contractual payment terms), within any reasonable period of time. So even if you think all bankers are “greedy”, their “greed” will generally cause them to properly evaluate delinquent/defaulted mortgage borrowers and work with them on reasonable payment terms, even terms below the mortgage contract. Keep in mind, there is NO legal obligation to do this, even though journalists and others have falsely portrayed that as so. The only legal obligation is what is spelled out and agreed to by both the mortgage lender and borrower in the mortgage contract, in accordance with all laws. Finally, I need to point out a significant journalist fraud that I see in all of these types of anti-business articles. These journalists either get some complaints and follow up on them or have a bias or opinion and seek out anecdotal evidence to support their theme. This is not high school or college essay time folks, where we were all taught to develop a thesis statement and then find some anecdotal evidence to support our conclusion! The U.S. housing and mortgage market is massive. It is tens of millions of borrowers and trillions in mortgages. It defies proper analysis through a handful of anecdotal borrower allegations (not even facts). Properly analyzing the U.S. housing and mortgage market requires entire market data and/or statistically valid samples. Any good journalist, one with independence and integrity and not bias and incompetence, would know this to be the case and would not allow themselves to report false narratives, like these New York Times journalists have done.”, Mike Perry, former Chairman and CEO, IndyMac Bank
June 26, 2016, Matthew Goldstein, Rachel Abrams, Ben Protess, The New York Times
How Housing’s New Players Spiraled Into Banks’ Old Mistakes
Some private equity firms that came in as the cleanup crew for the housing crisis are now repeating errors that banks committed, while others are bypassing the working poor.
When the housing crisis sent the American economy to the brink of disaster in 2008, millions of people lost their homes. The banking system had failed homeowners and their families.
New investors soon swept in — mainly private equity firms — promising to do better.
But some of these new investors are repeating the mistakes that banks committed throughout the housing crisis, an investigation by The New York Times has found. They are quickly foreclosing on homeowners. They are losing families’ mortgage paperwork, much as the banks did. And many of these practices were enabled by the federal government, which sold tens of thousands of discounted mortgages to private equity investors, while making few demands on how they treated struggling homeowners po.
The rising importance of private equity in the housing market is one of the most consequential transformations of the post-crisis American financial landscape. A home, after all, is the single largest investment most families will ever make.
Private equity firms, and the mortgage companies they own, face less oversight than the banks. And yet they are the cleanup crew for the worst housing crisis since the Great Depression.
Out of the more than a dozen private equity firms operating in the housing industry, The Times examined three of the largest to assess their impact on homeowners and renters.
Lone Star Funds’ mortgage operation has aggressively pushed thousands of homeowners toward foreclosure, according to housing data, interviews with borrowers and records obtained through a Freedom of Information request. Lone Star ranks among the country’s biggest buyers of delinquent mortgages from the government and banks.
Nationstar Mortgage, which leaped over big banks to become the fourth-largest collector of mortgage bills, repeatedly lost loan files and failed to detect errors in other documents. These mistakes, according to confidential regulatory records from a 2014 examination, put “borrowers at significant risk of servicing and foreclosure abuses.”
Unlike the banks, Nationstar wears many hats at once: mortgage bill collector, auction house for foreclosed homes and lender to new borrowers. By working every angle, and collecting fees at each step, the company faces potential conflicts of interest that enable it to make money on what is otherwise a costly foreclosure process.
In the rental market, The Times found, other big private equity firms largely bypassed the nation’s poorest neighborhoods as they scooped up and renovated foreclosed homes across the country. Those firms include Blackstone, a huge private equity firm and the nation’s largest private landlord of rental houses.
These decisions point to shortcomings of the government’s response to the housing crisis. Rather than enact sweeping changes to housing policy, the government largely handed the problems to a new set of companies.
Normie Brown and her husband, Derrick, have lost two fights — first with their bank and then with private equity. Initially, the Texas couple say, they faced a wrongful foreclosure by Bank of America. The bank paid them $50,000 as part of a broader government settlement over suspected mortgage abuses, and the Browns used that money to fight for their house in court.
But the couple couldn’t stop their new bill collector, Nationstar, from auctioning off their home.
“You think all you have to do is show them where they did you wrong, and basically justice will prevail,” Mr. Brown said. “That wasn’t the case.”
The court hadn’t yet decided the case, but it didn’t matter: They lost their house. The couple has since separated and Mr. Brown, a decorated Gulf War veteran, said he had moved in and out of homelessness.
Nationstar declined to comment on the Browns’ case, but said it had outperformed banks on avoiding foreclosure. Nationstar’s chief executive, Jay Bray, said in an interview that “foreclosure is always, always the last resort.”
Private equity plowed into the housing market after big banks and regional lenders, facing a crackdown from federal regulators for wrongful foreclosure practices, pulled back in the aftermath of the crisis. The shift led private equity firms to spend tens of billions of dollars acquiring homes and troubled mortgages from banks and the government.
For private equity firms, which specialize in buying companies at a bargain, the housing market was just their latest investment in a distressed asset. These firms, unlike banks, raise money for their deals from pension funds and other huge institutional investors.
The wave of private equity investment in housing has had a positive impact on the American economy.
The firms displaced poorly performing banks. They also helped stabilize the nation’s housing market, and it achieved that through smart business decisions about where to put its money. That, in turn, rewarded investors — which is how private enterprise is supposed to work.
But much of this investment has not benefited poor neighborhoods. Banks are expected, under the Community Reinvestment Act, to help meet the credit needs of low-income neighborhoods in areas they serve. Private equity has no such obligation.
The idea is that banks should follow an implicit social contract: In return for government loans and other support, they are expected to serve a community’s needs. Private equity, which unlike the banks does not borrow money from the government, is answerable to its investors. Those investors include some of the nation’s largest pension plans, whose members — teachers and police officers among them — may support improvements to such lower-income areas.
Ruskin, Fla., was hit hard by the 2008 housing crisis and has since attracted private equity investors. Credit Jason Henry for The New York Times
As a result, The Times found, private equity has focused on buying newer homes in middle-income areas like the suburbs of Tampa, Fla. They have largely avoided more urban communities with older homes, because doing so would be less lucrative for their investors.
“There has been a missed opportunity here,” said Dan Immergluck, a professor of city and regional planning at the Georgia Tech College of Design, who has studied the effect of the financial crisis on housing. “They are pushing the market up at the top end and neglecting the bottom end.”
Government officials are also concerned that private equity’s mortgage firms face less scrutiny than banks. While banks are examined by regulators for financial soundness, no similar testing occurs for private equity’s companies.
Ginnie Mae, which issues securities backed by mortgages with government guarantees, wants Congress to grant it greater oversight over nonbank mortgage firms and provide money to perform “stress tests.” The fear is that one firm’s failure would create hardship for millions of customers.
“It’s an Achilles’ heel for us to some degree,” said Ted Tozer, Ginnie Mae’s president.
The Rise of Foreclosure Inc.
Buried in a confidential bond document, in a jumble of legalese, Lone Star explains to investors one way it profits from delinquent loans. Lone Star’s mortgage subsidiary will lower a borrower’s monthly payment if “the net present value of a modification is greater than the net present value of a foreclosure, loan sale or short sale.”
Translation: If foreclosing on a homeowner is the most profitable option, Lone Star is likely to foreclose.
Federal officials hoped things would be different.
In 2012, America was still in the grips of the worst housing crisis in decades. Foreclosure signs lined the American landscape, casting a shadow on more than 3.5 million homes. In some communities, abandoned houses outnumbered occupied ones. And soured mortgages made by banks were weighing on the government because it had insured them against default.
The government, eager to stem its own losses, decided to ramp up the sale of distressed mortgages to investors. In all, it has sold more than 100,000 soured mortgages to investors — one of the largest such series of sales. The mortgage sales enticed private equity firms like Lone Star into the mortgage market, where they saw bargains.
Housing officials reckoned that private equity firms would bring about change. For one thing, these firms were among the only investors with pockets deep enough to take on billions of dollars worth of ailing mortgages. And they could be more flexible than the banks in keeping Americans in their homes because they had bought the mortgages at steep discounts.
But instead of showing greater flexibility, Lone Star — much like the banks before it — has often remained rigid about modifying mortgages. And in some cases it has moved quickly to foreclose, taking possession of homes to sell them, according to dozens of court proceedings, as well as interviews with borrowers and housing advocates.
In a statement, Caliber Home Loans, Lone Star’s mortgage servicing subsidiary, said that “modifying a nonperforming loan for a borrower is almost always the most profitable option for a lender, and Caliber is incentivized to pursue that outcome.”
Yet Lone Star and Caliber have foreclosed on more than 14 percent of the 17,000 loans the firm picked up at auction from the Department of Housing and Urban Development in 2014, according to an analysis of loan filings that RealtyTrac performed for The Times. Caliber is now moving toward foreclosing on at least another 3,200.
Some critics say the government is partly to blame by not expressly requiring private buyers to modify most loans. Its priority, these critics argue, was to sell off the mortgages to protect taxpayers against losses, rather than protecting homeowners.
“I understand HUD wants to make its money back,” said Representative Michael E. Capuano, a Massachusetts Democrat. But, he said, “hedge funds and private equity firms have one interest only, and that is the bottom line.”
Mr. Capuano is one of dozens of lawmakers who have pushed for major changes in the auctions, including greater involvement of community groups and nonprofits, which often cannot afford to bid because the government sells the loans in huge bundles.
In May, in an apparent acknowledgment of the problem, a HUD spokesman said the agency was drafting rules to force investment firms to be more accommodating to borrowers.
In its defense, Caliber said that 71 percent of the 17,000 mortgages it bought in the HUD auction had already begun the lengthy foreclosure process and that more than half of the homes were vacant at the time of foreclosure. Caliber said its goal was to “avoid foreclosure whenever possible,” noting that it had done so for roughly 4,200 homeowners in the pool of mortgages it bought from HUD.
Modifications don’t always save borrowers money.
After filing for personal bankruptcy, Michael Rego, 51, of Yonkers, held out hope for a loan modification when JPMorgan Chase sold his delinquent mortgage to Lone Star. Last October, he received a letter from Lone Star’s Caliber that began: “Congratulations! You are approved for a trial period plan.”
But his hopes were dashed when it turned out that the proposed modification would actually increase his monthly payment by $500. Two months later, to add insult to injury, Mr. Rego lost his job as a marketing consultant at Citigroup.
“I would hate to just walk away from the house,” said Mr. Rego, who has lived in the three-bedroom home for nearly 20 years. “But if I have to, I have to.”
Caliber and Lone Star have largely opted not to participate in government programs that encourage mortgage modifications. To date, Caliber has received just $3.3 million in payments from the Treasury Department for modifying loans in compliance with the federal Home Affordable Modification Program.
Caliber’s unwillingness is illustrated by two personal-bankruptcy cases in White Plains. In both cases, homeowners challenged Caliber’s decision to not modify their loans. The homeowners argued that Lone Star bought the mortgages from a bank under terms that require Caliber to consider loans for the government program to help struggling borrowers.
In contrast with Caliber, most banks have participated more fully in the government modification program, as has Nationstar, which has received $158 million in payments.
Lone Star, led by the billionaire investor John Grayken, has expanded Caliber — which employs more than 1,000 people — into one of the nation’s fastest-growing lenders. As a business, Lone Star has been a success. It has generated an average annual net return of 20 percent for investors for more than two decades.
It also just completed one of the largest securitizations of nonprime mortgages since the financial crisis. In early June, the firm announced a $161.7 million bond deal backed by mortgages underwritten by Caliber, including many loans to people who had either filed for bankruptcy or been previously foreclosed on.
The escalation comes as a recent survey of housing counselors and lawyers ranked Caliber last among 11 mortgage servicers in most aspects of dealing with borrowers.
And the New York attorney general, Eric T. Schneiderman, opened an investigation last fall into Caliber over its handling of delinquent mortgages. Mr. Schneiderman recently expanded the investigation to include an examination of Lone Star’s securitization of mortgages, including delinquent loans.
The New York State Department of Financial Services is also reviewing some of Caliber’s practices.
“These companies are pitching their models as being well aligned with home buyers, but it’s hard to know if that’s true,” said Sarah Edelman, director of housing policy for the left-leaning Center for American Progress.
New Players, Old Problems
Inside Nationstar’s headquarters on the outskirts of Dallas, government regulators made an alarming discovery — and then another one, and another.
The regulators, who gathered at Nationstar in 2014 for what should have been a routine examination, found “inaccurate information” in customer loan files, according to confidential documents reviewed by The Times. Nationstar, which became a huge mortgage bill collector in recent years, often failed to detect these errors “until the foreclosure process is underway.” Some of the breakdowns, the documents said, “placed consumers at significant risk of servicing and foreclosure abuses.”
Regulators laid the blame on Nationstar, citing deficient technology and a failure to employ enough trained workers as it rapidly expanded to become the nation’s fourth-largest mortgage bill collector. In 2010, it ranked 18th.
The examination, conducted by more than 15 states and the federal Consumer Financial Protection Bureau, showed the flaws of private equity’s new role in the mortgage market. Nationstar, controlled by the Fortress Investment Group, was repeating some of the banking industry’s mistakes.
As new regulations prompted banks to scale back their servicing of mortgages, companies owned by private equity went on a buying spree. Private equity sensed an opportunity as the mortgage servicing business became a liability for the banks, leading Bank of America alone to reach settlements worth billions of dollars over federal accusations of using illegal foreclosure documents and unfair rejections of loan modifications. Since 2012, Nationstar has bought the rights to collect payments on more than $450 billion in mortgages, much of it from Bank of America.
The previously unreported documents detailing Nationstar’s 2014 examination tell the story of its expansion and the problems that followed. “Nationstar Mortgage pursued a strategy of explosive and virtually unchecked growth, but did not put in place appropriate operational controls,” one regulatory memo said.
Authorities are investigating Nationstar based on the 2014 examination, and it could face an enforcement action this year.
Jay Bray, Nationstar’s chief executive, acknowledged that “candidly, we did a poor job” handling the 2014 exam. But since the exam, he said, “We are proud of the work we’ve done to improve the customer experience.” The company has invested in technology and added staff, he said.
“Did we make mistakes? Yes. Was it a systemic problem? I don’t think so,” he said, attributing the problems to growing pains.
“It’s really easy to play Monday morning quarterback,” he said.
Wesley Edens, a founder of Fortress, Nationstar’s private equity backer, maintains that the servicer has performed better than the banks it replaced. Since buying some of the banks’ most troubled assets, Nationstar has overseen a 50 percent decline in delinquent loans, though those improvements coincided with a broader recovery in housing.
“Thank God those loans were moved from Bank of America to Nationstar, because so many borrowers were better off,” Mr. Edens said in an interview.
(A Bank of America spokesman called the company “an industry leader in providing foreclosure avoidance solutions to more than 2.1 million customers since the beginning of the crisis.”)
Mr. Edens, noting that Fannie Mae ranked Nationstar higher than its peers at preventing delinquency, encouraged The Times to contact federal authorities to verify these improvements. The authorities declined to comment.
Nationstar notes that, over the last four years, it has approved more than 172,000 loan modifications that saved homeowners an average of $380 a month. Whereas all servicers collectively rejected 69 percent of applications for the government’s modification program, Nationstar has been more generous, rejecting 54 percent of borrowers.
Nationstar also recently announced plans to rename its mortgage operation “Mr. Cooper,” presenting a more consumer-friendly face.
Even as Nationstar has shown improvements, on multiple occasions last year the company “wrongfully terminated” borrowers from the federal mortgage modification program, according to a published report. “Over multiple quarters, Nationstar is wrongfully kicking people out of the program, and that’s a real serious concern,” said Christy Romero, the special inspector general for the 2008 bank bailout law and the author of the loan modification report.
In Phoenix, Millard and Adria Gaines struggled to modify their loan as it changed hands four times in 20 years.
During a recent interview at his home, Mr. Gaines walked to his kitchen freezer, pulled out a pack of cigarettes and described how he tried for years to get Bank of America, and then Nationstar, to modify their loan. In 2014, his wife exchanged emails with a Nationstar “foreclosure prevention specialist” who suggested she apply for a modification.
After months of no change, Mrs. Gaines sent a letter detailing family misfortunes that imperiled their finances, including that her husband had been told he had acute kidney failure.
About six months later, Nationstar finalized a mortgage modification for the Gaineses. But even then — reducing the interest rate to 3.2 percent from 5.3 percent — it was months too late to help the Gaineses avoid a second bankruptcy.
Sheri Cellini, right, with her children in their rented home in Ashland, Ore. Credit Ruth Fremson/The New York Times
Sheri Cellini’s family of five loved their ranch-style home in Ashland, Ore., a small town in the foothills of the mountains. They lived there for six years until a foreclosure turned them into renters.
“The kids want to drive by it all the time,” Ms. Cellini said of the family’s old house. “It’s an uncomfortable thing.”
The recent history of her former home reflects private equity’s new dominance. By the time their home was foreclosed on in 2013, and after the family tried in vain to lower monthly payments, the Cellinis had bounced from one mortgage firm to another.
The company that oversaw their foreclosure was Nationstar. Another family took over the Cellinis’ house, winning it through an online auction platform called Homesearch. That family then obtained a mortgage through a company called Greenlight Loans.
The companies all have different names and different roles, but all three are essentially the same company. Homesearch and Greenlight are owned by Nationstar.
The whirl of transactions illustrates how Nationstar can control nearly every stage of the mortgage process, posing potential conflicts of interest as it earns fees along the way. Nationstar collects bills and, when people don’t pay, can foreclose on homes. Nationstar earns fees auctioning those homes through Homesearch. Ads on Homesearch, which is now known online as Xome.com, direct bidders to Greenlight.
Nationstar can then collect on the new mortgage, bringing the process full circle.
Shane Hunter, Kelly McCoy and their two children at their Ashland home, which once belonged to the Cellinis. Credit Ruth Fremson/The New York Times
Shane Hunter, who won the Cellinis’ house through Homesearch, took out a mortgage with Greenlight, even though he had been leaning toward another lender. Nationstar earned a 5 percent “buyer’s premium” by selling the house through its auction website, an extra $10,450 that it rolled into the loan.
As a mortgage bill collector, Nationstar’s interests typically align with borrowers’, because foreclosing can be far more expensive than modifying and continuing to service a loan. But because Nationstar earns fees from selling homes through its auction site, as well as making new mortgages from winning bidders, that added business may compete with the company’s interest in keeping borrowers in their homes.
Mr. Bray, the Nationstar chief executive, said the company would always rather keep people in their homes. “We don’t make money from foreclosing on folks,” he said, pointing to data showing that it costs the company 10 times as much to handle a loan in foreclosure. “We hate foreclosures.”
To prevent potential conflicts, Nationstar said it keeps its servicing employees separate from the auction staff. They work in different buildings and use separate email systems, the company said.
Auction sites are a driver of Nationstar’s growth. From 2013 to 2015, revenue more than tripled in the unit that includes the auction platform and other services. This stands in contrast with banks, which generally do not own these types of sites.
In interviews, several borrowers said that Nationstar required them to list their homes with Homesearch, even after they had found a buyer through their own real estate agent. While Nationstar argues that Homesearch helps to validate an outside offer price, homeowners and their agents complained that it could slow the sale process.
“Any requirement to use a particular auction site, especially one affiliated with the loan servicer, raises serious concerns,” the Connecticut attorney general, George Jepsen, said in a statement.
He is one of several state attorneys general investigating Nationstar’s auction business, questioning whether it imposes unnecessary costs on consumers. The New York State Department of Financial Services is conducting its own investigation of the auction process and the potential conflicts it presents, according to a letter obtained through a public records request.
The case of the Browns — the Texas couple who first fought their bank, then fought Nationstar — illustrates Nationstar’s aggressiveness when selling a home through an auction site.
The Browns won a temporary restraining order against Nationstar as they fought what they argued was a wrongful foreclosure. But Nationstar went ahead and listed the home for sale on Auction.com, an outside auction platform that has split fees with Nationstar.
On Sept. 26, 2013 — more than a week before the restraining order would expire — Nationstar auctioned off the home through Auction.com. Next, Nationstar moved the case from state to federal court, and it closed the deal before the new judge could rule.
“This was our first home,” said Ms. Brown, who ultimately lost the case after the home was sold. “I didn’t want to give up on it.”
A home in Ruskin owned by Blackstone, a private equity giant and the country’s largest landlord of rental houses. Credit Jason Henry for The New York Times
To a visitor, Ruskin, Fla., a town just south of Tampa, looks like cookie-cutter suburbia.
But to private equity, it is pay dirt. Blackstone, one of the largest private equity firms, owns 125 homes in Ruskin that it operates as rentals.
The financial crisis hit Ruskin hard: Nearly 800 families lost their homes in foreclosures, according to RealtyTrac. But the town is bouncing back. Amazon has opened a giant warehouse and distribution facility in Ruskin that now employs 2,000 people.
Across America, private equity firms stormed areas like Ruskin, calculating that the decline in home prices would be relatively short-lived. Ruskin’s long-term economic prospects looked good. And it had many relatively newer homes, which are cheaper for a landlord to maintain.
In making such a large investment in housing — $9 billion buying and renovating mainly foreclosed homes over the last four years — Blackstone effectively bet on which communities would emerge from the housing crisis as winners.
It bet correctly. The firm, which now owns about 50,000 homes in 14 markets, recently reported that the fund holding its Invitation Homes rental subsidiary has generated a 23 percent annualized return for its investors.
More broadly, private equity’s investment in housing helped stabilize home prices across the country. The Obama administration supported private investment in foreclosed homes, with Timothy F. Geithner, then the Treasury secretary, remarking in 2011 that it would “support neighborhood and home price stability.”
Still, there has been a cost. Blackstone largely steered clear of more urban communities with older homes, which are more expensive to maintain.
LuTanya Garrett, who pays $1,395 a month for a four-bedroom house that Blackstone owns in Ruskin, said she was looking for another home because of the rent. “I feel like if I’m going to pay rent like this, I might as well own my own home,” said Ms. Garrett, 47, a mother of three.
Nationally, the average rent on an Invitation Homes home is $1,605 a month. The median rent in Ruskin is $1,452, according to Trulia, a listing service.
Blackstone says 72 percent of its homes have monthly rents that are within federal affordability guidelines for the markets it operates in.
Institutional investors, which collectively have bought more than 200,000 homes across the United States, point out that the rental homes they operate are a small fraction of the more than 15 million rental homes nationwide. Most are owned by small investors.
About 3 percent of Blackstone’s rental homes are leased to lower-income tenants with federal housing subsidies known as Section 8 vouchers. The numbers are lower for most other big private equity firms.
Blackstone has said it welcomes Section 8 voucher holders, if the federal subsidy is enough to cover the rent. “We are proud to provide quality housing choices for working families,” said Claire Parker, a spokeswoman for Invitation Homes.
Blackstone needs to compete for middle-market renters to serve pension fund investors that have come to expect strong returns. And that leads private equity to focus on suburban communities with relatively few Section 8 voucher holders.
Housing advocates argue that large private equity firms investing in rental housing should do more for the communities where they operate. “The urban areas took a big hit, and they have stayed down,” said Alan Mallach, senior fellow at the Center for Community Progress, a nonprofit that advises communities on dealing with vacant and blighted homes. “These firms are going into markets which would have recovered anyway.”
There are exceptions, though. Patriarch Properties of Newport Beach, Calif., is one small private equity firm that has set up shop mainly on the South Side of Columbus, Ohio, where abandoned buildings dot the streets, some inhabited by squatters and drug users.
For the most part, Columbus has rebounded from the financial crisis. Unemployment is low, and the city is home to companies like Nationwide Insurance and Huntington Bancshares.
Patriarch has bought about 260 deteriorated homes on the city’s South Side, an area yet to recover, and is using a combination of investor capital and low-interest loans from a nonprofit to rehabilitate the properties. The firm intends to rent the finished homes to residents, many with Section 8 vouchers, for $500 to $900 a month.
”We are trying to bring up an entire area,” said Ethan Temianka, 32, the founder of Patriarch.
But there are questions over whether Patriarch can generate the hefty returns it promised investors.
“Their very presence is a validation that there is a renaissance in the South Side,” said the Rev. John Edgar, who heads Community Development for All People, a nonprofit group already rehabbing homes in Columbus. “But I am not certain that in the long run the business model is viable.”
Les Neuhaus contributed reporting. Susan Beachy, Alain Delaquérière and Doris Burke contributed research.
A version of this article appears in print on June 27, 2016, on page A1 of the New York edition with the headline: Private Equity Hits Close to Home.
“…Title II of the act (Dodd Frank), contrary to Prof. Blinder’s account, doesn’t apply to banks at all, but only to nonbank financial firms. Banks are specifically excluded from the title and left to resolution by the FDIC. The FDIC doesn’t have the resources, financial or otherwise, to keep open a failing trillion-dollar bank and of course cannot sell it to a healthy trillion-dollar bank—the agency’s usual tack—without making the TBTF problem worse. So the only recourse under Dodd-Frank is a taxpayer bailout…
…It’s important to read the statute, and a good reason – as House Financial Services Committee Chairman Jeb Hensarling has just proposed – to open Dodd-Frank and start over. Peter J. Wallison, American Enterprise Institute, Washington
“I would encourage your to read all of the WSJ Letters to The Editors, below.”, Mike Perry, former Chairman and CEO, IndyMac Bank
June 14, 2016, Opinion, The Wall Street Journal
Dodd-Frank Hasn’t Eliminated TBTF Banks
The reason the administration doesn’t “trumpet” Dodd-Frank’s elimination of too-big-to-fail is simple: the act doesn’t do that.
In answer to Alan Blinder’s “Why Trump, the ‘King of Debt,’ Hates Dodd-Frank” (op-ed, June 7): The reason the administration doesn’t “trumpet” Dodd-Frank’s elimination of too big to fail is simple—the act doesn’t do that. Not even close. Title II of the act, contrary to Prof. Blinder’s account, doesn’t apply to banks at all, but only to nonbank financial firms. Banks are specifically excluded from the title and left to resolution by the FDIC. The FDIC doesn’t have the resources, financial or otherwise, to keep open a failing trillion-dollar bank and of course cannot sell it to a healthy trillion-dollar bank—the agency’s usual tack—without making the TBTF problem worse. So the only recourse under Dodd-Frank is a taxpayer bailout. It’s important to read the statute, and a good reason—as House Financial Services Committee Chairman Jeb Hensarling has just proposed—to open Dodd-Frank and start over.
Peter J. Wallison
American Enterprise Institute
Prof. Blinder’s accusing Donald Trump of “cozying up to the big bankers” for donations fails the smell test because last I heard, it was Hillary Clinton who was taking millions from Goldman Sachs and other large banks for speeches, while Wall Street writes huge checks to her presidential campaign.
Further, I haven’t met anyone yet who feels “safer” as a result of the Consumer Financial Protection Bureau or Dodd-Frank. I do know the government has hired an army of regulators, while large financial institutions have hired an army of compliance experts in an attempt to reduce 10-digit fines, lawsuits and other penalties reported in the news daily. This isn’t economically efficient, doesn’t create wealth or productivity and doesn’t keep us “safer.”
Had the Clinton administration not pushed mortgages on people who couldn’t afford them in the ’90s, we wouldn’t have had the 2008 debacle. Dodd-Frank will not fix this and like ObamaCare is an aggressive play by the Democratic Party to take over and regulate a large segment of the economy, grow government payrolls, regulatory power and Democratic Party contributions—all at the expense of consumers, taxpayers and small businesses.
Does Prof. Blinder understand that big banks can afford regulatory armies while community banks cannot? Does Secretary Clinton offer sympathy for the community banks the country is losing at the rate of one a day? Small businesses are losing their funding mechanisms and can’t get a loan. Big banks are bigger than ever, while small banks have shrunk or vanished. In November 2015, there were 1,524 fewer banks with assets under $1 billion than in June 2010—a 20% decline. What a roaring success!
Dodd-Frank has brought us this and much more, but it hasn’t brought us additional security. And it’s just getting started.
Alan Blinder states that Dodd-Frank was passed to “ensure that we never have a repeat of . . . the disgraceful practices that led up to” the financial catastrophe of 2008. I was not aware of it, but I am so glad to hear that Rep. Frank included in his signature legislation a provision that forbids future Democratic senators from “rolling the dice on the housing market.”
“In summary, there is an upper limit to the amount of equity capital a financial firm could be required to hold without pressing its rate of return on equity below what history suggests is the average minimum competitive 5%. Because financial intermediation requires significant leverage to be profitable, risk, sometimes large risks, are inherent to this indispensable process. And on very rare occasions, it will break down and may require the temporary substitution of sovereign credit for private capital…
…In the late 19th Century, U.S. banks required equity capital of 30% of assets to attract liabilities required to fund their assets. In the pre-Civil War period, that figure topped 50%. When determining the levels of adequate regulatory capital, it is important to recognize that the decision is not independent of the scope of regulated bank activity. There are limits to the level of regulatory capital. A bank, or any financial intermediary, requires significant leverage to be competitive. Without adequate leverage, markets do not provide a rate of return on financial assets high enough to attract capital to that activity. Yet at too great a degree of leverage, bank solvency is at risk. To find the regulatory balance we need to seek the highest average ratio of capital to assets the banking system can tolerate before significant numbers of banks are required to raise their margin and/or shrink their size. In the years immediately prior to the onset of the crisis Pi/A averaged 0.012 and therefore inferred maximum average regulatory capital, C/A, was 0.24. If Pi/A were to revert back to the average of the first quarter century of the post-war period (0.0075) then Pi/A=0.0075 and C/A=0.15, marginally above the 12% to 14% presumed market determined capital requirements, that would induce banks to lend freely. While such calculations derive from a static model and are necessarily imprecise, they emphasize the regulatory tradeoffs between capital requirements and scope of permissive banking activities. They suggest that a targeted regulatory capital requirement of 13% to 14% leaves considerable leeway for regulators to raise capital requirements provided that in the process, the scope of banking activities is not unduly restricted.”, Excerpts from Alan Greenspan’s, “The Crisis”, March 2010
“Make no mistake about it, private bankers and their unsecured creditors don’t determine the adequacy of bank capital levels. They never have, despite articles like the one below. Why? Because the government insures/guarantees the vast majority of their liabilities (deposits) and so they have THE most important financial interest in determining bank capital levels and that’s why they and they alone set and enforce them. Clearly, pre-crisis, the government bank regulators at The Fed, FDIC, and elsewhere were horribly wrong, but it was in their interest to blame the private bankers rather than take responsibility. Greenspan’s paper (the excerpt above and elsewhere) makes clear that this blame is a lie, another part of the government’s false narrative about the crisis. Could a private banker have chosen to hold even more capital than required by the government’s bank regulators? Probably not. It’s a very competitive marketplace and as Greenspan points out, higher the capital levels, either cause you to have lower returns to investors and/or high rates to borrowers and/or lower rates to depositors. In other words, if you don’t respond to your banking competitors, and keep similar government-mandated capital levels as them, you will not be able to raise capital, raise deposits, and/or lend in a competitive manner.”, Mike Perry, former Chairman and CEO, IndyMac Bank
June 12, 2016, Donna Borak, The Wall Street Journal
Regulators to Banks: We’ll Size Up Your Risks
International regulators want to limit banks’ leeway in assessing the riskiness of their assets, a step that critics say could crimp lending, dent profits and worsen risk rather than reduce it
A number of legislators, regulators and bankers including J.P. Morgan Chase & Co. CEO James Dimon have questioned the way different banks calculate their risks. PHOTO: T.J. KIRKPATRICK FOR THE WALL STREET JOURNAL
By Donna Borak
International regulators want to limit banks’ leeway in assessing the riskiness of their assets, a step that critics say could crimp lending, dent profits and worsen risk rather than reduce it.
A committee of overseers in Basel, Switzerland, since the end of last year has proposed five different rules that would require banks to use standardized calculations instead of their own when measuring possible losses on everything from loans to interest rates to fraud.
The Basel Committee on Banking Supervision is considering a series of rule revisions as part of their effort to finalize postcrisis capital rules. Regulators agreed to spend this year addressing weaknesses spotlighted by the financial crisis, including minimizing the variance in how banks weigh their own risk in three key areas: credit risk, market risk, and operational risk.
One proposal would stop banks from calculating their own exposure to other banks, large corporations and stockholdings. Another imposes tougher capital requirements on swaps, bonds and other securities that banks plan to trade. Capital requirements often depend on lenders’ exposure to risk.
The moves reflect regulators’ frustration with varying loss estimates across banks. Some bankers also have questioned whether peers are playing down risks in the hope of boosting profit.
The 29-member Basel Committee includes representatives from the U.S., Germany, Netherlands, European Union and China. It doesn’t set banking rules directly, but makes recommendations for member countries to implement. Yet Basel rules have significant influence over how member countries regulate their banks.
Leading industry trade groups have sharply criticized the proposed changes, saying they would do more harm than good. They say the proposed rules are a de facto way to boost capital requirements beyond current levels already criticized by some executives as onerous.
“We are particularly conscious of the cumulative impact that this suite of proposals stands to have on the required levels of bank capital, and on the ability of banks to support the economy,” Andrés Portilla, an official at the Institute of International Finance, a financial industry association, wrote to the Basel Committee June 3, the deadline for comments on the rules.
The issue taps into a debate about the merits of broadly weighting assets for risk. Some maintain the approach has become overly complex and should be scrapped in favor of simpler metrics based on unadjusted measures of assets. House Financial Services Chairman Rep. Jeb Hensarling, (R., Texas) criticized the use of risk weighting in unveiling his financial-overhaul plan earlier this month. He called the approach “too complex, requiring millions of calculations” to account for banks’ capital needs.
In April, Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., called the practice “misleading.”
“No other industry is allowed to make these kinds of adjustments,” he added.
James Dimon, chief executive of J.P. Morgan Chase & Co., also has questioned the way different banks calculate their risks. During an investor-day presentation in 2011, he said a comparison of his bank’s risk-weighted assets with those of peers suggested the peers’ approach “can’t be accurate … I mean, obviously, someone’s using far more aggressive models.”
Basel officials maintain that too much variation across banks’ approach to weighing the risk of assets has undermined the effect of postcrisis safeguards.
Capital and liquidity buffers “can only be as reliable as the underlying risk measurement and management,” said William Coen, secretary-general of the Basel Committee in an April speech in Australia.
Mr. Coen displayed with his speech graphs showing variations in the way different banks estimated the risk weights in their portfolios, with widely varying results. “It’s fair to say that the wide discretion provided to banks in the current framework is likely a major driver of this high degree of variability,” said Mr. Coen.
Industry representatives are pushing back. Greg Baer, president of the Clearing House Association, a trade group of large U.S. banks, wrote this month in his group’s trade publication that while bank models have been criticized, “there are multiple reasons to be still more skeptical of uniform, government-devised regulatory risk assessments.”
He said, as an example, that with credit-card accounts, the rules don’t adequately account for various types of borrowers or market segments. He added that standardization would steer banks to make the same choices, potentially amplifying the losses if bets go bad.
In recent years, American regulators have tended to respond to Basel proposals with their own stricter standards, prompting complaints from U.S. executives of “gold-plating.”
Since December, the Basel Committee has revised or finalized five different proposals that each essentially would swap out banks’ calculators for regulators’ own. In addition to the rules about calculating their own credit risk from exposure to other banks, large corporations and stockholdings, policy makers are considering capping banks’ exposure to assets such as corporate debt, mortgages, and credit cards. Another proposal would tighten how banks fix the amount of capital they need to protect against possible losses from legal problems or external events like cybercrime.
“We want to give banks leeway to build their own views on risk, to sharpen risk management of their own business models. On the other hand, you don’t want this to lead you to … question the reliability of the outcomes,” said Andrea Enria, chairman of the European Banking Authority, speaking at a seminar at the Institute of International Finance in Washington in May.
“Below is my email conversation with The New York Times Sunday Business columnist Gretchen Morgenson (start at the bottom and read up, it is short) who wrote a false hit piece this past Sunday (June 26, 2016) on my friend and former mentor Angelo Mozilo of Countrywide. This blog will respond to her false article (really just an anti-banker, anti-mortgage lender propaganda piece) later this week…
…P.S. Gretchen sought my thoughts, because I collaborated with her on two of her columns. One in 2014 and one this year on Lending Club.”,Mike Perry, former Chairman and CEO, IndyMac Bank
From: Michael Perry [mailto:email@example.com]
Sent: Thursday, June 23, 2016 10:37 AM
To: Morgenson, Gretchen
Subject: RE: Morning Mike–just wondering
Gretchen (This is off the record), I hear you on what your reporting turned up some time ago. But there is a big difference now. All that information, emails and conversations with employees, is just hearsay (non-factual) until both sides have had a chance to respond and the court has had a chance to decide the undisputed facts and apply the law to those facts. In the case of that Countrywide woman, the appeals court unanimously decided that the government presented no evidence (of intent) she or Countrywide/BofA committed fraud. The case was thrown out. In the recent Justice Dept. civil investigation against Angelo and the other CW execs……all that hearsay evidence you cite and Angelo and the CW execs probably had a chance to respond to it through their attorneys….all this was considered by the Justice Department, a liberal Justice Department that is biased to get bankers, and still they felt they didn’t have a case. To me, that is clear evidence of no wrongdoing….and yet the government had these folks under investigation and threat of litigation for nearly a decade. To me, that is cruel and unusual punishment. Respectfully, it was fine for you to report this hearsay evidence before all this occurred, but is it really fine to do so now….when you know all of the above has occurred? Best, mike
From: Morgenson, Gretchen [mailto:]
Sent: Tuesday, June 21, 2016 3:02 PM
To: Michael Perry <firstname.lastname@example.org>
Subject: Re: Morning Mike–just wondering
Hey Mike–Thanks for your comments. I’m surprised that you believe Countrywide was clean. That certainly wasn’t consistent with what I turned up in my reporting which included many conversations with former employees. And the emails surfaced in the SEC case were pretty damning.
But thanks for responding. I appreciate your position and know that it’s always good to consider the contrary point of view!
On Tue, Jun 21, 2016 at 5:35 PM, Michael Perry <email@example.com> wrote:
Sorry for the delay, my parents are staying with us right now.
I think the news is really great and here are three quotes from me that you may use….all three, two, or one (without edit). If you would like to edit them or you want something else, please let me know. Best, mike
“I was happy to hear that Justice Department dropped its civil investigation of Angelo and the other Countrywide execs. I never believed they did anything wrong and I know, from my own experience, that they were unfairly scapegoated for a worldwide real estate (and other assets) bubble/bust.”
“The false narrative that greedy and reckless bankers caused the financial crisis continues to crumble. It never made sense that most of the bankers of the world acted that way and at the same time. As the years have passed, many experts have laid bare our government’s key role in precipitating the crisis, including well-intended government mandates (to lend) and guarantees, not to mention The Federal Reserve’s massive role in distorting rates, investment and lending activity. And this latest decision by Justice, combined with other crisis-era court decisions, confirms the truth; no facts that materially support this false narrative were ever determined by any court of law.”
“Calls by some, even today, for criminal charges against crisis-era bankers reminds me of the terrible McCarthy era in our Nation’s history. This decision and other court decisions, have really destroyed the false and highly improbable narrative that most of the world’s bankers acted in a greedy and reckless manner at exactly the same time.”
From: Morgenson, Gretchen [mailto:]
Sent: Monday, June 20, 2016 5:14 AM
To: Michael Perry <firstname.lastname@example.org>
Subject: Morning Mike–just wondering
what you think of the latest news that no case will be brought against Angelo. Would love your views.
“…Christopher Maloney with Bloomberg News wrote up a piece titled, “FHA Should Impose ‘Cap’ on Riskier Borrowers, NY Fed Says.” “A ‘sustainable’ housing policy would necessitate ‘the FHA impose a cap’ on borrowers’ expected default rates, NY Fed economists W. Scott Frame, Kristopher Gerardi and Joseph Tracy write in a blog post…
…The FHA should determine the cap at time of origination using the credit score, LTV, and economic outlook. Government-insured mortgages ‘are not low-risk loans,’ as their high LTV and low credit scores combine ‘into extremely high default rates.’ The 5-yr cumulative default rates (CDR) during 2000-2011 period varied between 5%-25%; those loans done through Fannie/Freddie showed default rates an ‘order of magnitude lower.’ The 2002 and 2009 vintage GSE loans had 5-yr CDRs of ~2%; same vintage GNMA loans were 10%/13%…..”The housing price collapse starting in 2006 resulted in FHA’s Mutual Mortgage Insurance Fund needing ‘financial assistance from the federal government’ in 2013. There is an ‘important relationship’ between credit scores of borrowers and government mortgage performance; lower credit score loans default at higher rate than higher credit score loans. In terms of FICO, loans with FICO scores <600 are ‘by far the riskiest segment’ with 5-yr CDRs peaking at >40% in 2007. Government-insured mortgages post-crisis peaked at ~35% of total in 2009 (from ~3% in 2000-2005 period) and have been ~20% over last 4 years.””,Excerpt from June 2016 Mortgage Industry Newsletter
“Ah!!! The truth is being revealed by the day. Government mortgages are high risk and their risk caused the FHA insurance fund to become insolvent and seek financial assistance from the U.S. Government during the crisis. It wasn’t mortgage fraud or underwriting errors, it was the inherent risk in the FHA loan program’s low down payment mortgages, to borrowers with subprime FICO scores. Yet the government and its DOJ blamed the mortgage lenders, because it fit the government’s false narrative that greedy and reckless bankers caused the crisis and also allowed them to recover tens of billions in their losses from private banks and mortgage lenders.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“In the 21st century, the United States has reinstated a broad system of debtors’ prisons, in effect making it a crime to be poor. If you don’t believe me, come with me to the county jail in Tulsa. On the day I visited, 23 people were incarcerated for failure to pay government fines and fees, including one woman imprisoned because she couldn’t pay a fine for lacking a license plate…
…This time, she had already spent 10 days in jail for failing to pay restitution for five bad checks written eight years ago to a grocery store. The bad checks totaled a bit more than $100, but with fees and charges added on she still owes $1,200 in restitution on them — and that’s after eight years of making payments. “If I can’t afford to pay it, how can I pay it?” Hall asked me, as we sat in a visiting room in the jail. “I can’t do it.” “Impoverished defendants have nothing to give,” Harris says, and the result is a system that disproportionately punishes the poor and minorities, leaving them with an overhang of debt from which they can never escape. The Supreme Court has ruled that people should be jailed only when they refuse to pay, not when they can’t, and in theory safeguards protect the indigent. In practice those safeguards are chimerical, and the poor are routinely jailed for being poor. The way forward is to curb these fees, end the use by courts of private collection companies that add their own charges to the debt, and limit court debt to some percentage of a person’s income. For now, some of the sums owed are staggering. Job Fields III told me he owes $70,000 in fees and fines. “It seems impossible,” he said, “but I’ve got to think positive.” Cynthia Odom told me that she owes $170,000 and constantly struggles with whether to pay the electricity bill, buy food for her two kids, or pay down the debt and stay out of jail. When kids are affected like that, as they often are, this system of jailing people who can’t pay fines is grotesque as well as Kafkaesque. “It’s either feed my kids or pay the fines,” Goleman said, “but if I don’t pay then I get a warrant.” Four times she has been arrested and jailed for a few days for being behind in her payments; each time, this created havoc with her children and posed challenges for keeping a job. Webb thinks that these modern debtors’ prisons are so punitive that the underlying motivation is to stigmatize and punish the poor. “It hurts their families, it doesn’t make us safer, it’s expensive,” she says. “I can’t think of another reason other than animosity toward the poor.””, Nicholas Kristof, “Is It a Crime to Be Poor?”, The New York Times
“If this was the private sector, this would have been on the front page of The New York Times and there would be government investigations and calls to prosecute the companies and executives involved. And the government’s new Consumer Financial Protection Bureau would have been all over this, but they won’t touch anything involving our own government. Instead, because it is our own government and amazingly our legal system, it isn’t getting the attention it deserves. This is our government behaving in an unethical and immoral manner and to some of the very poorest of our fellow Americans. It’s not right.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Is It a Crime to Be Poor?
Rosalind Hall in the Tulsa County Jail. She has spent almost 18 months behind bars, in short stints, for failing to pay a number of fines and fees related to petty crimes. Credit Allison V. Smith for The New York Times
TULSA, Okla. — IN the 1830s, the civilized world began to close debtors’ prisons, recognizing them as barbaric and also silly: The one way to ensure that citizens cannot repay debts is to lock them up.
In the 21st century, the United States has reinstated a broad system of debtors’ prisons, in effect making it a crime to be poor.
If you don’t believe me, come with me to the county jail in Tulsa. On the day I visited, 23 people were incarcerated for failure to pay government fines and fees, including one woman imprisoned because she couldn’t pay a fine for lacking a license plate.
I sat in the jail with Rosalind Hall, 53, a warm, mild-mannered woman with graying hair who has been imprisoned for a total of almost 18 months, in short stints, simply for failing to pay a blizzard of fines and fees relating to petty crimes (for which she separately served time). Hall has struggled for three decades with mental illness and drug addictions and has a long history of shoplifting to pay for drugs, but no violent record.
Tears welled in her eyes as she told how she was trying to turn her life around, no longer stealing, and steering clear of drugs for the last two years — but her fines and fees keep increasing and now total $11,258. With depression and bipolar disorder, she has little hope of getting a regular job, so she is periodically arrested for failing to pay.
This time, she had already spent 10 days in jail for failing to pay restitution for five bad checks written eight years ago to a grocery store. The bad checks totaled a bit more than $100, but with fees and charges added on she still owes $1,200 in restitution on them — and that’s after eight years of making payments.
“If I can’t afford to pay it, how can I pay it?” Hall asked me, as we sat in a visiting room in the jail. “I can’t do it.”
Hall survives on food stamps, castoff clothes provided by churches, a friend’s willingness to give her a room, and $50 a month she earns by cleaning a woman’s house. She allocates $40 to paying restitution, leaving her just $10 a month in cash for her and her beloved puppy (whom her neighbor looks after whenever she’s jailed for debts).
“It’s 100 percent true that we have debtor prisons in 2016,” says Jill Webb, a public defender. “The only reason these people are in jail is that they can’t pay their fines.
“Not only that, but we’re paying $64 a day to keep them in jail — not because of what they’ve done, but because they’re poor.”
This is as unconscionable in 2016 as it was in 1830, and it is a system found across the country. In the last 25 years, as mass incarceration became increasingly costly, states and localities shifted the burden to criminal offenders with an explosion in special fees and surcharges. Here in Oklahoma, criminal defendants can be assessed 66 different kinds of fees, from a “courthouse security fee” to a “sheriff’s fee for pursuing fugitive from justice,” and even a fee for an indigent person applying for a public defender (I’m not kidding: An indigent person is actually billed for requesting a public defender, and if he or she does not pay, an arrest warrant is issued).
Even the Tulsa County district attorney, Stephen Kunzweiler, thinks these fines are a ridiculous way to finance his office. “It’s a dysfunctional system,” he says.
A new book, “A Pound of Flesh,” by Alexes Harris of the University of Washington, notes that these modern debtors’ prisons now exist across America. Harris writes that in Rhode Island in 2007, 18 people were incarcerated a day, on average, for failure to pay court debt, while in Ferguson, Mo., the average household paid $272 in fines in 2012, and the average adult had 1.6 arrest warrants issued that year.
“Impoverished defendants have nothing to give,” Harris says, and the result is a system that disproportionately punishes the poor and minorities, leaving them with an overhang of debt from which they can never escape.
The Supreme Court has ruled that people should be jailed only when they refuse to pay, not when they can’t, and in theory safeguards protect the indigent. In practice those safeguards are chimerical, and the poor are routinely jailed for being poor. The way forward is to curb these fees, end the use by courts of private collection companies that add their own charges to the debt, and limit court debt to some percentage of a person’s income.
For now, some of the sums owed are staggering. Job Fields III told me he owes $70,000 in fees and fines. “It seems impossible,” he said, “but I’ve got to think positive.” Cynthia Odom told me that she owes $170,000 and constantly struggles with whether to pay the electricity bill, buy food for her two kids, or pay down the debt and stay out of jail.
When kids are affected like that, as they often are, this system of jailing people who can’t pay fines is grotesque as well as Kafkaesque.
Amanda Goleman, once homeless and an illegal drug user, has turned her life around but still struggles to pay old fines. Credit Allison V. Smith for The New York Times
Amanda Goleman, 29, grew up in a meth house and began taking illegal drugs at 12, and her education wound down after she became pregnant in the ninth grade. For a time, she and her daughter were homeless.
But Goleman has turned herself around. She has had no offenses for almost four years and has been drug-free for three. For the last year, by her account and her employer’s, she has held a steady job in which she has been promoted — but she is still a single mom and struggles to pay old fines while also raising her three children, ages 2, 10 and 13.
“It’s either feed my kids or pay the fines,” Goleman said, “but if I don’t pay then I get a warrant.” Four times she has been arrested and jailed for a few days for being behind in her payments; each time, this created havoc with her children and posed challenges for keeping a job.
Webb thinks that these modern debtors’ prisons are so punitive that the underlying motivation is to stigmatize and punish the poor. “It hurts their families, it doesn’t make us safer, it’s expensive,” she says. “I can’t think of another reason other than animosity toward the poor.”
A version of this op-ed appears in print on June 12, 2016, on page SR1 of the New York edition with the headline: Is It a Crime to Be Poor?.
“The party of Franklin Roosevelt through Lyndon Johnson and its alliance with private-sector industrial unions made Democrats aware that their fortunes ultimately were joined to the success of the private sector. The Democrats are now the party of Bernie Sanders, the progressive icon Sen. Elizabeth Warren and—make no mistake—of Barack Obama, a man of the left from day one. Rather than distrust the private sector, they disdain and even loathe it…
…The policies of John Kennedy and Bill Clinton, now in disrepute, ensured that annual economic growth remained at its postwar average of about 3%. Those Democrats understood the private sector, even if they distrusted it. In the new Democratic Party, defined by the substance of Sen. Sanders’s campaign, the role of the private sector is to transmit revenue to the public purse. Private business has become an exotic abstraction, like the province of Cappadocia in the Roman empire. As the Obama presidency made clear, this new relationship is not based on the tax code, which the new Democrats think of as a kind of dumb sump pump. The driver now is legal prosecution or the constant threat of it by government enforcement agencies—Justice, Labor, the NLRB, and the new Consumer Financial Protection Bureau, whose originator was Elizabeth Warren.”Excerpts from Daniel Henninger’s, “Bernie Should Hold Out”, The Wall Street Journal, June 9, 2016
“Unfortunately, I and my family lived this political reality when IndyMac Bank was seized during the crisis by the FDIC on July 11, 2008 and I have done my best to document this truth on my blog. (The above dovetails perfectly with: June 9, 2016 – Statement 1198: “Why crisis era mortgage defect rates cited by the government (and others) are false, a massive Red Herring. Part 1: The General Logic Behind My Argument… ) It’s why I left the Democratic Party some time ago. P.S. Coincidentally and ironically, FCIC Chairman (and Democratic politico) Phil Angelides, who I think is wrong and politically-motivated/biased in his crisis views, used to be a friend, as we were both from Sacramento. I even hosted a political fundraiser for him in Pasadena.”, Mike Perry, former Chairman and CEO, IndyMac Bank
“Here you go. One last posting related to the mortgage underwriting defect issue. A few years ago, the government made similar bogus claims related to mortgage servicing and the Big Banks caved and settled for billions, without any facts being determined. However, my former bank, fought these bogus claims in the normal adversarial fact-finding process and it was found that only 5.6% of borrower’s in foreclosure had suffered any damage as a result of their mortgage being serviced improperly…
…And “improperly” did not mean that even one loan was serviced in contravention of the note and deed of trust (the legal documents agreed to by lender and borrower). What it meant is that 5.6% of the mortgages weren’t serviced exactly to the technical terms (often very minor) proscribed in the government’s new rules telling mortgage lenders how they had to service mortgages. A far lower rate of error than the government had alleged or anyone had imagined. The falsity of the government’s bogus claims, “that hundreds of thousands if not millions of borrowers lost their homes due to the improper servicing of their mortgage loan”, was again revealed.”, Mike Perry, former Chairman and CEO, IndyMac Bank
May 1, 2014 – Statement 181: “Only one lender, OneWest, the former IndyMac bank, would not settle, opting instead to continue with the review of loan files. After completing most of the review this year, OneWest, a California-based bank that has a former Goldman Sachs partner as its chairman, doled out a relatively modest $8.5 million and only to homeowners who had actually suffered financial harm…
You can visit the posting directly here:
“Why crisis era mortgage defect rates cited by the government (and others) are false, a massive Red Herring. Part 3: FHA’s Post Endorsement Technical Review (PETR) Quarterly Loan Summary Report, from 2012-2016, is the second of two Smoking Gun documents that are both publicly-available from FHA itself, that definitively proves this contention of mine…
…How so? First you must read blog statement #410 and Parts 1 and 2 (the two just previous blog postings), in order. Then take a look at the SECOND SMOKING GUN FHA DOCUMENT (2SGFD) just below. The Reviews by Fiscal Year chart in Section 1 of this document show as clear as day that from 2012 to 2016, because FHA (like banks and other mortgage lenders internal QC departments and unlike early QC done on private MBS securities issuance, which only involved new, current loans) selected an adverse sample that included a high percentage of EPDs (early payment defaults) and other higher risk mortgages and mortgage lenders, they found an Initial Unacceptable (material defect) rate of between a low of 40.08% in 2012 to a high of 47.53% in 2014, yet a Final Unacceptable Rate (a year or so later) of just 4.45% for 2012 and a Final Unacceptable Rate of 5.81% for 2014. That is an 89% reduction in 2012 and an 88% reduction in 2014, from Initial to Final material mortgage defect rates. 2013 and 2015 are similar, 2016 shows a current Final Unacceptable Rate of 26.98% because it is too soon for FHA’s Initial Unacceptable claims for 2016 to be resolved. Bottom line, once FHA mortgage lenders had an opportunity to explain and/or resolve Initial Unacceptable (material mortgage defect) claims by FHA in the 2012-2015 period, the initial very high (40% to 45%+) material mortgage defect rates decline dramatically (by 85% to 90%) to a level around 4.5% to 5.5% and at that level, FHA then requires (appropriately) the mortgage lender to indemnify the FHA insurance fund against any future loss. That is an amazing reduction, given that FHA’s PETR audit sample is not random, but adverse and includes as part of its selection of mortgages, about 35% to 40% EPD’s and most of the rest being higher risk mortgages and higher risk mortgage lenders. This adversarial business process is what should have happened with crisis era mortgage defects that FHA and others initially discovered, but it didn’t. See the excerpt from the May 4, 2016, Wall Street Journal Editorial Board, “The Quickening” just below. It’s powerful and disturbing, isn’t it? The bottom line is the government stopped this normal industrywide adversarial process, a loan-by-loan fact finding process, for crisis era (2005-2011) mortgage loans, I think because they didn’t want the truth known and/or they could see from 2012 to 2016 adversarial process at FHA, that their mortgage defect allegations would be proven to be bogus, a massive Red Herring. And if the government’s mortgage defect allegations were bogus, it would destroy their ability to recapitalize the insolvent FHA insurance fund with billions in coerced settlement dollars from Big Banks and other large FHA mortgage lenders. It would also destroy a key crisis era claim of the government and others. And if the government’s crisis era mortgage defect claim is destroyed, as has been done in this three-part blog posting by me, then our liberal government’s false claim that “greedy and reckless” bankers were the primary cause of the crisis, also mostly crumbles away. Right? The truth has emerged!”, Mike Perry, former Chairman and CEO, IndyMac Bank
SECOND SMOKING GUN FHA DOCUMENT (2SGFD): FHA Post Endorsement Technical Review (PETR) Quarterly Loan Summary Report, from 2012 to 2016:
Excerpt from The Wall Street Journal Editorial Board, “The Quickening”, May 4, 2016
“How confident is Justice that it can prevail on the facts? In 2013 the government told Quicken Loans that because of the investigation, the FHA would stop conducting standard reviews of the company’s mortgages originated prior to 2012—meaning all of the loans at issue in the suit. In other words, the government wanted less data generated on the quality of Quicken mortgages. Who needs to suppress evidence if prosecutors can ensure it’s never created in the first place?”
May 6, 2016 – Statement 1169: “Why would the government sue what is arguably the most taxpayer-friendly issuer of federally backed loans in the country? The Detroit-based lender put it this way in a filing last year: “Quicken Loans appears to be one of the targets (due to its large size) of a political agenda under which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into paying nine- and ten figure sums and publicly ‘admitting’ wrongdoing, including conceding that the lenders had made ‘false claims’ and violated the False Claims Act.” That sounds like a fair summary…
“Why crisis era mortgage defect rates cited by the government (and others) are false, a massive Red Herring. Part 2: FHA’s Post-Crisis Quarterly Loan Review Findings, from 2012 to 2016 are one of two Smoking Gun documents that are both publicly-available from FHA itself, that definitively proves this contention of mine…
…How so? I first uncovered this issue in the Fall of 2014, in reading a mortgage industry newsletter that highlighted high, material underwriting error/mortgage defect rates on Q1-2014 FHA-endorsed (insured) mortgages. That set off a big alarm for me and I blogged about it at the time. See the link to Statement #410 below. You must read #410 to understand this blog posting. But because I, nor anyone at IndyMac, was ever accused of underwriting mortgage defects, I didn’t pursue it further at the time. I am now. I have attached the link to the source Q1-2014 FHA document (FIRST SMOKING GUN FHA DOCUMENT) just below. This document shows very high and material mortgage defect rates (48% unacceptable/material defect and only 16% acceptable or conforming) doesn’t it? Even higher than pre-crisis ones claimed by the DOJ/FHA in their recent, April 2016, settlement with Wells Fargo and much higher than the mortgage defect rates claimed in the recent Goldman Sachs’ PMBS settlement. So what’s going on here? First, you must read blog posting Part 1, before you read this Part 2, where I lay out the logic as to “what’s going on.” As I noted and explained in that Part 1 posting, these are just “initial” quality control findings. FHA even says that in the preamble to the document, included just below. However, I believe FHA misstates and confuses, when it also says in that preamble that “unacceptable is a material defect at the time of endorsement” and therefore implies it can’t be resolved or cured by the lender, possibly with just an explanation and/or missing document and/or possibly with assistance from the borrower or others. The fact of the matter is that isn’t true and FHA itself evidences that it isn’t true, when you compare the FIRST SMOKING GUN FHA DOCUMENT (1SGFD) below to the SECOND SMOKING GUN FHA DOCUMENT (2SGFD). You will just have to trust/believe me for the moment (until I post Part 3), but here are the numbers. In the 1SGFD just below, 6,645 loans were reviewed by FHA in Q1-2014 and 48% were deemed unacceptable (material defect) by FHA. Beyond just the illogic of this is occurring so far AFTER the mortgage crisis and after mortgage lenders had supposedly reformed/improved (see #410), the fact is that FHA, as lenders and their advisors, explain and/or respond to these initial findings, FHA reduces/rescinds their initial material findings, quite significantly. How significantly? For the entire year 2014, FHA had an initial unacceptable/material mortgage defect rate of 47.53% (10,979 loans) and yet a FINAL unacceptable rate of just 5.81% (1,341) loans, of which lenders appropriately indemnified FHA against loss on 1,274 of them. Let’s wrap up here. The headline initial material mortgage defect rate was 47.53% in 2014 and was reduced by a whopping 88%, as a result of initial findings (Hearsay evidence, see Part 1 blog posting), being converted to facts, as a result of the normal adversarial process (which is common in industry QC finding disputes) in business contract disputes. The adversarial process did not occur with crisis era initial mortgage defects, a fact I will discuss in more detail in Part 3. P.S. Full disclosure, the data on FHA’s Quarterly PETRs (1SGFD) doesn’t quite reconcile with the data on the PETR Quarterly Loan Review Summary (2SGFD) and even the data within 2SGFD doesn’t quite reconcile, but hey it’s the government….”close enough for government work”, as my dad liked to say….and it doesn’t change the conclusion I document here in any way.” Mike Perry, former Chairman and CEO, IndyMac Bank
FIRST SMOKING GUN FHA DOCUMENT: Link to FHA’s Quarterly Loan Review Findings; all Single Family Post-Endorsement Technical Loan Reviews (PETRs) conducted by FHA between December 31, 2013, and March 31, 2014 (on page 3-4 of 5). This report reflects the initial rating of each file reviewed during the quarter. A loan rating of unacceptable may change if the lender provides mitigating documentation to FHA. Even if a rating is subsequently mitigated, an initial rating of unacceptable indicates the loan endorsement file exhibited a material defect at the time of endorsement.
October 7, 2014 – Statement 410: “Again, the truth is finally emerging. FHA’s audit of mortgage loans insured by them in Q1 2014 apparently has uncovered huge, “material” underwriting error rates. If this is true, it goes a long way to disprove the mainstream view that pre-crisis mortgage underwriting deficiencies were a material cause of mortgage (and mortgage securities) losses during the financial crisis…
April 12, 2016 – Statement 1150: “What do you think of the Wells Fargo settlement last Friday? As I understand it, Wells “admitted” to the claims in the settlement, but its “non-response” press release seems like a denial? The government’s harsh claims (that Wells was a poor underwriter of FHA mortgages over a long period of time, that Wells intentionally defrauded FHA by not disclosing QC findings for years, and that Wells’ poor underwriting of FHA loans caused people to lose their homes..) seem mostly false to me, knowing the Democrats/liberals in charge of our government the past 7 years have a goal of cementing blame on Wall Street/the Banks/mortgage lenders for the crisis…