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     Feb 26, 2009
A scam at the heart of the US
By Julian Delasantellis

Travelers visiting New York city from Americas's rural heartland in the 1980s might have been able to regale the folks back home with tales of encounters with knife-wielding drug addicts and/or disease-scourged prostitutes, but it's not like their predecessors who made the same trek back in the 1950s didn't have a tale to tell around the cracker barrel as well. They might have come back to the square dance and talked about playing and losing at the game of three-card monte.

Set up on rapidly movable folding card tables, in order to remain mobile against the disproving eyes of the constabulatory, three-card monte games were operated by New York sharpies who, when spying a rural rube from Racine, Wisconsin, or maybe Red Wash, Utah, would invite the visitor to play a simple card game. Three cards from a deck would be dealt face up-one a face card 

 
such as a King or Queen. Then the cards would be turned face down, the "dealer" would arrange and re-arrange them on the table, and, the contestant would be invited to chance a wager as to which card was the face card.

This was a lot harder than it seemed, especially with the dealer usually employing sleight of hand to hide the face card in his sleeve. No matter how hard he tried, no matter with how much concentration he watched the dealer's hands, the contest could never be won by its very nature; the player was destined to lose the card and his wager - rather like the chances of those facing foreclosure in the current mortgage and financial crisis of ever gaining relief from their hardship.

Joseph Campbell might have described the common cross-cultural themes in human mythology by talking about the "Hero with a Thousand Faces", but in America last week, the hero that arose had but a single face. It was not US Airways pilot Chesley "Sully" Sullenberger, whose perfect Hudson River landing of an Airbus A-320 on January 15 saved 155 lives. It wasn't the Greenwich Connecticut police officers who stopped the rampage of Travis the chimpanzee with volley fire from their service issue Glocks, and, for the animal rights crowd, it was not even Travis's heroic rebellion against the brutal millenniums long repression of homo sapiens.

It was CNBC Chicago commodities reporter and trader Rick Santelli, who, in a suspiciously unrehearsed (did you know his network contract is up for renewal this summer?) voiced one of the most powerful insurgent sympathies in America these past 30 years or so. It was a pure revolt of the affluence of the have's against the desperation of the have not's, in this case, against President Barack Obama and those who might benefit from his "Homeowner Affordability and Stability Plan".

"The government is promoting bad behavior," Santelli screamed from a futures trading pit. "Do we really want to subsidize the losers' mortgages, or would we like to buy cars, buy houses in foreclosure, and give them to people that might have a chance to actually prosper down the road and reward people that could carry the water instead of drink the water? This is America! How about we all stop paying our mortgage! It's a moral hazard. How many of you people want to pay for your neighbor's mortgage [on a house] that has an extra bathroom and [for which the neighbor] can't pay their bills? ... President Obama are you listening? Cuba used to have mansions and a relatively decent economy. They moved from the individual to the collective - now they're driving '54 Chevys .. We're thinking of having a Chicago tea party in July - all you capitalists that want to show up at Lake Michigan, I'm going to start organizing it."

On the CNBC website, the adulation of Santelli ran thick. This post, by "Alan" illustrates a key component of the conservative strategy of stoking anger and umbrage against the poor - it's a lot easier to whip up resentment against those one sees every day, as opposed to the left's continuing uphill struggles to organize a resistance against the faceless, far-away world economic elite.
Where do I sign up to join the Chicago Tea Party? It's time that Americans demand that Congress listen to us! I pay my bills, I work two jobs, and this year paid more in taxes because my wife and I both work. We pay our bills, student loans, etc, yet every semester I teach, I run across students that throw away their Pell Grants and other financial aid by not coming to class or by acting like college is nothing more than high school. With great opportunities comes great responsibility - I think we need to demand an end to wasteful spending.


Very little of this, such as "Alan's" diverting the focus from mortgages to loans taken out by the students he despises and being made to teach (note to Alan - you can go a lot longer before you start hating the students by teaching part-time) in exchange for a paycheck, bears any real or even imaginary resemblance to anything in the Obama plan; it's just another example of the elite's continued engendering of free-form rage in the upper middle-class against the lower middle-class.

Many in the upper middle-classes cling desperately to the belief that it is only the existence of the poor that keeps them - the upper middle-class - from entering the ranks of the super elite, and, as the elite is now attaching its powerful suction hoses to the upper middle-class to vacuum and drain them dry as they so recently have been doing with those classes underneath, the fervor with which the upper middle-classes hold on to this belief grows in direct proportion to how poor they are now becoming; as their wallets are lightened, they weigh themselves down with the ballast of rage. I, for one, liked the introduction of toilet envy in the Santelli rant; the Old Testament's Ninth Commandment admonishes one not to "covet your neighbor's house"; as for the bidet in the master bath, well, that's still apparently up for grabs.

The core focus of the Obama mortgage plan seems to be to try to throw a spanner down into the foreclosure-forced sale process in which more supply drives down real estate prices, even fewer homeowners are able to refinance, leading to more foreclosures eroding the values of bank mortgage-backed securities - in short, the wealth-destruction machine now plaguing the capitalist world.

For many homeowners, being able to refinance existing mortgages into newer mortgages with today's insanely lower interest rates could go a long way towards pulling them out of their troubles, but, with the market values of their homes declining, there is insufficient "equity" (house value minus remaining mortgage) to meet the standard refinancing guidelines. Typically, if your "loan to value" ratio is above 0.8 (your mortgage value is 80% or more of your appraised house value) you'd be denied the opportunity to refinance.

The Obama plan provides for homeowners whose mortgages are owned by the now fully owned government-sponsored enterprises (GSEs) of Fannie Mae and Freddie Mac being allowed to refinance at loan to value ratios from 0.8 to 1.05. The GSE's own somewhere around 50% of US mortgages. A homeowner must contact his loan servicer - the party to which he writes the mortgage check, in order to see if his is in the lucky half.

Of course, the logic here is that a mortgage made current and being paid off is not one defaulted on and rotting away in some bank's portfolio of mortgage-backed securities.

If the above is insufficient to keep a borrower in a home, a further initiative, to be financed with US$75 billion of Troubled Asset Relief Program (TARP) funds, aims to reduce monthly mortgage payments to a level that the homeowner can manage. The mortgage owners would be responsible for bringing the homeowner's monthly payments to around 38% of monthly income: government payments would then kick in to help to further bring the level further down to 31%.

It is important to note that, while the monthly payments are being reduced under this component of the plan, there will be no obligation that the overall mortgage amount, the principal, will be reduced. Some interpretations of the plan say that the banks and other mortgage holders will be able to tack on the interest payments they're temporarily foregoing onto the back of the mortgage as principal.

Also, for those followers of Santellism, the ideology born of the image of imprudent mortgage borrowers spending all night gleefully running around and through their mansions flushing their many toilets while poor Mr Taxpayer has to get in line with his kids behind the door of just his one, the plan precludes help to those who borrowed way too profligately. There will no assistance for multiple-property-owning real estate "flippers", those with loan-to-value ratios above 1.05 (like those whose McMansions have suffered a huge decline in value) and those whose "jumbo" mortgages, $420,000 or more, did not qualify for purchase by the GSEs.

For those dressed up in their Clinique Bonus Days war paint, opening boxes of mortgage-backed securities with their Swiss Army knives to toss into Lake Michigan at the Santelli tea party, one wonders if they fully realize just what they are doing, just how much damage they are doing to both the economy and themselves.

As US real estate prices continue to fall, one of the core dogmas of modern American life, the section of the "American dream" that offers social mobility (upward social mobility - there's plenty of downward social mobility going on now) through the physical mobility of being able to move to a better neighborhood, or, to be able to move across the state or country to take advantage of a better career opportunity, comes very much into question.

As real estate prices decline, more and more property owners owe more on their mortgages than their houses could be sold for. Unless they are willing, or even able, to bring a big, fat, five-figure-or-more check to the closing table when they sell the house, that's where they are and that's where they're gonna stay. (For a discussion of the phenomenon of underwater homeowners, see Pain relievers should feel the pain, Asia Times Online, February 28, 2008.)

In other words, one hopes that you really like your current house and neighborhood. Unless real estate prices turn around through some mechanism similar to the Obama mortgage plan, that 30-year mortgage you signed in 2005 means exactly that - you won't be getting out of that house until 2035 - not one minute sooner.

But in the effort to save American homeownership, the devil has once more taken refuge in his most secure redoubt - the details - specifically, the crooked mug's game America's moneyed elite have established at the nexus of law and finance.

Any American who spent time with grandparents over the holidays probably received a good solid earful of how mortgage practices have changed over the past 30 years or so. Most Americans know that, instead of having the bank whose august lobby they nervously walked into hold the mortgage note to maturity, mortgages now get wrapped and unwrapped, palletized and unbundled, so extensively that the mortgage borrower probably no longer has any idea who actually owns his mortgage. Who is it that is actually getting the money that the "servicer" - the firm dedicated to managing the obligation and to which the mortgage checks are written - is sending somewhere up the line?

In the old days, there would be no distinction between mortgage owner and servicer; they would be exactly the same entity. The bank would take the mortgage check, cash it, then deposit it in its vaults. Now, it's infinitively more complex.

In the early part of the 20th century, the Hearst newspaper chain ran a comic strip about the misadventures of two grossly overmannered Frenchmen, Gaston and Alphonse. The two were always getting themselves into the medium's standard comic conniptions, but they could never do much of anything about it since they were just so insufferably polite.

"After you, my dear Gaston," Alphonse would offer. "I wouldn't dream of it, you first, dear Alphonse," Gaston would reply.

The servicers and mortgage owners have got this little Alphonse and Gaston routine going now. "Why don't you save the mortgage borrowers?" say the servicers, usually big Wall Street "money center" banks, to the mortgage bondholders. "You go first" say the mortgage note holders.

Frequently, bank public relations shills rush warm and fuzzy press releases (I bet there's even little hearts where the dots should go above the i's, and pictures of little teddy bears on the side) out to the clueless financial media about how the bank is delaying or suspending foreclosure proceedings among mortgage clients who have fallen on hard times and need a bit of breathing room to get right back on their feet, the poor fellows. Wells Fargo, Bank of America, Citigroup and JP Morgan Chase made such an announcement on February 13.

But look closer at the beneficence. The forbearances and suspensions apply only to those mortgages that the four institutions both own and service. Got a mortgage serviced by Bank of America (that's who you write the check to) but not owned by BofA? You're out of luck; in that case, the servicing arm of the bank is going to continue to interpret its fiduciary duty as a servicer to the mortgage note holder and continue foreclosure proceedings.

In the opposite case, where the bank "owns" a note serviced by someone else, the question becomes, just what does the bank own? In the mortgage securitization craze, mortgage debt got so mixed, combined and re-combined that the original mortgage on one house may be at least part-owned by 100 separate bondholders. It's nice if the servicing entity gets word that one of these 100 wants to act like a human being instead of a bondholder, but unless the servicer hears from the other 99, the servicer's lawyers are going to tell the company to continue with the foreclosures, so as to preclude the possibility of one of the mortgage holders getting so ticked off at not receiving their pound of pain through foreclosing on the mortgage borrower that they sue.

This division of labor, and, more importantly, bifurcating of responsibility, is not an issue for mortgages under the wing of the GSEs. There, the ownership of the mortgages by the GSEs and the attendant right to manage or modify them in any manner to their liking is unquestioned. However, in contravention to the cry from the political right that the entire financial crisis is a result of the GSEs doing too much, in reality, it's more the case that they did too little.

In losing control of the mortgage insurance market to the private sector's credit default swaps, the current mortgage holder/servicer dichotomy entered creation, and it is now consuming hundreds of thousands of American homeowners each month. (For an account of the laissez faire's cheerleaders attempt to replace the GSE's with credit default swaps, see Jaws close in on Bernanke, Asia Times Online, July 16, 2008.)

Interestingly, the securitization industry trade group, the American Securitization Forum, is urging the industry to take upon itself the role of savior of the borrowers that the servicers are hesitant to assume. The ASF claims that the servicers can, without the formal approval of the loan owners, take it upon themselves to modify delinquent loans. That includes working with borrowers to make mortgages more affordable rather than proceeding to foreclosure. In an ASF commentary on the Obama mortgage rescue plan, it was noted that "Our goal is to enable servicers and borrowers to create loan modifications with sustainable mortgage payments for the borrower while also serving the best interests of investors."

"Serving the best interests of investors" - as defined by the servicers. In this interpretation, even if the lenders want to proceed to foreclosure and recovery of an asset through a forced sale of the property, the servicer can just ignore the wishes of the mortgage note holder.

The Obama plan does recognize the divided responsibility between servicer and borrower. To stiffen up their spines a bit, it is offering a $1,000 bonus to servicers for every loan they modify, and it is also stating a desire to clarify comprehensively into statute the new, expanded powers of the servicers.

Still, one wonders just how much good this will do. As long as the servicers are made to worry that any forbearance shown to borrowers risks a lawsuit from mortgage holders, they'll continue to be showing up at the courthouse door with bundles of foreclosure petitions. It's nice to have the rules proposed by the president supporting your position, but there's nothing in the plan that has the US Department of Justice sending a barrister out to argue your case. At least for that large proportion of mortgage borrowers not under the protection of the GSEs, it is questionable just how much good, just how many mortgage borrowers, are going to be assisted in this.

But if the government can't fight your battle, might you have a bit more luck doing it yourself? Strange as it may seem, a growing number of mortgage borrowers are finding that it is possible to play David to big finance's Goliath. In its haste to rule the world, big finance seems to have forgotten about the slingshot it left lying on the ground.

The servicers are saying that their foreclosure actions are just looking after the interests of the mortgage holders. "Prove it" says a whole new breed of informed and aggressive lawyers for mortgage borrowers.

Prove that you're acting in the interest of the mortgage holders - produce a piece of paper from the mortgage holder authorizing the servicer to act in this fashion. Prove that you actually know who the mortgage holder is; with mortgages cut and chopped, with insolvent and other banks being chewed up and spit out every day, can you actually find the real holder of the mortgage; that information may be in some discarded office computer or scrapheap junked file cabinet long lost in the endless consolidation of the banking and financial system.

In essence, mortgages are, at their core, just IOUs between borrower and lender. The borrower bar is arguing that the servicers should not be granted an a priori assumption of standing in these disputes between borrower and lender, and many bankruptcy judges are listening.

In his "livinglies" blog, Florida attorney Neil Garfield posts a petition he submitted to the US Bankruptcy Court in California.

"We are all familiar with the securitization process. The steps, if not the process, is simple. A borrower goes to a mortgage lender. The lender finances the purchase of real estate. The borrower signs a note and mortgage or deed of trust. The original lender sells the note and assigns the mortgage to an entity that securitizes the note by combining the note with hundreds or thousands of similar obligation to create a package of mortgage backed securities, which are then sold to investors.

"Unfortunately, unless you represent borrowers, the vast flow of notes into the maw of the securitization industry meant that a lot of mistakes were made. When the borrower defaults, the party seeking to enforce the obligation and foreclose on the underlying collateral sometimes cannot find the note ... a person seeking to enforce a missing instrument must be a person entitled to enforce the instrument, and that person must prove the instrument's terms and that person's right to enforce the instrument ... Enforcement of a note always requires that the person seeking to collect show that it is the holder."

If you're in a situation where you're facing foreclosure and the GSE's can't help you, this strategy, or finding a lawyer competent in this strategy, may be your last best hope. At the very least you'll pick up a few months or year of added time; maybe even enough for those on the other side of the table to realize they're going to have to negotiate with you for real. Maybe, at the very least, you can take some measure of comfort or solace realizing just how many banker silk suits and drawers you're ruining.

Have the judges act like New York City flatfoots and shut down the three-card mortgage monte game created by securitization. If a Santellite throws a tantrum, just tell him to go take a time out in a corner of his house - for the next 30 years.

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.


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