Interest rate 'freeze' - the real story is fraud

[Guest]

Interest rate 'freeze' - the real story is fraud

Bankers pay lip service to families while scurrying to avert suits, prison


Sean Olender - Sunday, December 9, 2007

New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."

Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.
Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures.

Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"

The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.

The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?

Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.

As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.

Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?

It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.

I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.

The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.

The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.

This logic is like saying shoppers seeking bargain-priced soup encourage the grocery store owner to steal it. I mean, we're talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.

Sean Olender is a San Mateo attorney. Contact us at insight@sfchronicle.com.


This article appeared on page C - 1 of the San Francisco Chronicle

[Guest]

Re: Interest rate 'freeze' - the real story is fraud

Jim Willie paints an utterly black picture. Who knows to what extent his dire forecast will be realised? Posted here for those among us who like to really get down and wallow in the thickest mire of blackest pessimism regarding the new year.

______________


GOLD & MORTGAGE FAILURE AVALANCHE

Jim Willie CB -- December 13, 2007


An avalanche comes in 2008. Its wreckage will hit both the USEconomy and banking world. The greatest deception in the bank sector this year has been the misrepresentation of the mortgage debacle as a subprime problem. That is akin to calling an iceberg only a problem for what one can see, when 90% of its mass lies below water. Ice is lighter than water. Most mortgage bonds are like acidic stones weighing down bank and investor balance sheets. Wall Street and the USGovt con artists, using tools are fraud and distortion, prefer the public and investment community to think of the 'Subprime Problem' as the source of distress.

On mortgage bonds, collateralized debt obligation derivatives, structured investment vehicles, all dominant in the news, reports constantly stress how the problem is traced to subprime mortgages to all those unworthy home loan borrowers who never should have been given such loans, even at higher mortgage rates. The systemic threat, both to the US banking system and USEconomy, has entered a new stage. The remedy addressed is sure to force the USDollar lower and the gold price higher, to occur in the next gear. Breakouts are coming which will seem to lose control, like what was seen in September and October.

OF DESPERATION & FIRE TRUCKS

Official policy in reaction to the USEconomic threat of recession will spill money into every corner and crevice. Gold and mining stocks will benefit. My forecast stated all summer long is that the USGovt maestros will gradually introduce increasingly broader rescue elements, since everything they try at early stages will fail. The USFed remains badly behind the curve, as yesterday they cut the official Fed Funds target rate, but did not sufficiently cut the Discount Window rate that imposes a Stigma Tax.

Today, the USFed announced a much broader bank liquidity policy, focused upon more auctions at set rates and a swap line with the Euro Central Bank. They have announced more coordination with the Bank of England, the Bank of Canada, the Swiss National Bank, and the US Federal Reserve. This is part of my forecast. They must have been working all night long.

By summertime 2008, the requirements for a grandiose Resolution Trust platform will be etched more clearly. The key to the gold price lies in two spots: 1) massive monetary inflation to treat the banking problems and prevent recession, 2) realized price inflation in a manner lacking disguise. John Mauldin uses the metaphor of fire trucks being called to the scene. The USFed has been amazingly shamefully slow in recognizing the problems. Stuck in their stupid "inflation versus growth" framework mindset, they miss both the interbank system seizures and home mortgage avalanche coming outside the prime mortgage corral.

The threat to the banking system will be staggering. The threat to the economic system will be broad and deep. The avalanche will expose the combined system as insolvent, broken, in need to total rescue. The damage will necessitate rescue platforms to undermine the entire US$-based monetary system, certainly sufficient to lift gold well past the $1000 level. By the time 2009 approaches, the system will be recognized as totally broken. The new question will be whether that system can indeed be repaired.

As measures put in place and debated for consensus approval, the urgently demanded movement should be the particulars on the new Resolution Trust Corporation. The desperation no longer hidden (like on Bernanke's face) will lift gold well past the $1000 mark. The impetus behind the gold price will turn to inflation much more than the US$ counter-lever. All major currencies will be inflating heavily, as seen in recent central bank decisions either to cut official interest rates or to hold steady. Major currencies will begin to be compared in a manner to judge which ones are weaker as they are undermined during stimulus to discourage economic recession and credit flow interruptions.

The new 2008 year will smash that notion, as an absolute avalanche of failed mortgages will slam the bank system and financial sector in general, the majority being prime mortgages. SHOCK & AWE IS RIGHT AROUND THE CORNER ON PRIME MORTGAGES, A FACT THE BANKERS ARE KEENLY AWARE OF!!! The villainous failed mortgages have a few traits in common. These primes are adjustable rate mortgages (ARMs) with harsh resets. They contain destructive features certain to cause as much pain as laughter for their insanity. Recall they are prime mortgages with lax features resembling subprime loans without the higher rates.

Only 150 to 225 thousand subprime mortgages will be addressed by this flimsy HOPE NOW freeze plan, and nothing among the looming prime mortgages heading for certain default. The innovative mortgage products face ruin. Large cross sections of newer mortgages, written since year 2000, are under-water badly. Their loan balances are much greater than their home values. THE NEW PHENOMENON IN 2008 IS RECOGNITION OF ZOMBIE LOANS, ZOMBIE HOMEOWNERS, ZOMBIE CONSUMERS, AND ZOMBIE BANKS. They are bankrupt without declaration; they are walking dead. An added footnote is needed to this auxiliary HTL special report, tied to accusations of fraud by large mortgage bond investors, both in the United States and foreign institutions.

MOTIVE: AVOID LAWSUITS & FORCED BOND BUYBACKS

The threat of court-ordered forced contractual bond buyback by Wall Street con artists is nearing a reality. If investors engage the Wall Street banker broker dealers in the renegotiation, refinances, and workouts, then those institutional investors will lose the right to sue Wall Street firms, and lose the opportunity to force fraudulent bonds to be bought back at perhaps ten times their current traded prices. Wall Street, given its Fascist Business Model connection with the USGovt, has enlisted Congressional help to place 'Safe Harbor' obstructions to lawsuits, thus absolving the criminal activities perpetrated by Wall Street.

The gaggle of Wall Street firms engaged in packaging mortgage bonds, ensuring they contained a 'AAA' false label, colluding with key agencies to misrepresent the sale of securities, has made a bold move to freeze troubled mortgages, and to dupe/lure investors into the process. If they take the bait, they lose the opportunity for remedy on hundreds of billion$ in fraud-ridden bond losses. My contention made for over two years is that the USGovt and Dept Treasury and Wall Street and numerous major icons in the United States embody institutionalized dishonesty. That perception is much more clear in 2007. Legal address and remedy of that institutionalized dishonesty might come in 2008.

Wall Street and other major bankers continue to soil their pants. They realize several looming tragedies:

• Prime 'AAA' mortgage bonds have lost roughly 20% of value
• Innovative flexible adjustable mortgages are due to default in droves
• Enormous growing list of under-water mortgages are beyond rescue
• Big banks are facing dire insolvency threats, as new defaults approach
• Enormous bond writedowns have only begun for big banks
• Insolvency can turn to bankruptcy with more debt rating agency downgrades
• Mortgage bond investors contemplate lawsuits, accusing Wall Street fraud
• Wall Street banks face the prospect of over $1 trillion in mortgage bond buybacks
• Rescue & remedy will trash the USDollar and catapult the gold price

As a preface, one should know that politicians did not advance this plan. The key initiators of the HOPE NOW project were three banks. It was an alliance led by the Federal Deposit Insurance Corp (insurer of banks), along with big banks and their lobbyists from Citigroup, JPMorgan, and Wells Fargo. These banks in my opinion are insolvent, soon to be forced into bankruptcy as the next round of the mortgage debacle unfolds from the 'innovative' adjustable and option laden mortgages. They all face bankruptcy, insured by the FDIC.

If lawsuits are filed and that road is traveled, declared bankruptcy is assured. The rescues to save the Ruling Elite will lift gold and trash the USDollar, as much from a new unprecedented round of monetary inflation, as from destroyed image of the US financial system. Freezes never work. When in college, my memory is vivid of the lunatic Nixon Wage Price Freeze. When it lifted, the price inflation rampage was the worst in modern history. My suspicion is that when any mortgage freeze is lifted, both mortgage rates will rise sharply and mortgage bonds will fall sharply in value.

Few have bothered to think about the infectious disease of moral hazard, to consumer and household reactions. Many economic participants will feel left out with the current rescue, against a backdrop of watching colossal fraud go unpunished. They will possibly act destructively, an intentional effort to destroy their credit rating so they can participate in national bailouts. Many live in homes with negative home equity. They might feel above the rules, immune to impact of their actions, engrained in destructive habits, feel powerful from a reprieve, want to be included, or just not care. They will feel they have nothing to lose.

The likelihood that property taxes will be paid, water & sewer fees paid, lawns mowed, hedges & trees pruned, garbage removed, broken windows repaired, holes in walls filled, driveway cracks filled, shingles straightened, liens on the property resolved, these are all in doubt in my book. Pride in ownership will turn ugly, into a free ride game. Practicalities are strained to the extreme. A zombie comes to learn to act with disregard, disrespect, and disobedience. Henry David Thoreau wrote 'Civil Disobedience' almost two centuries ago in response to the Spanish Civil War, yet another false flag self-inflicted attack. That was done to the USS Maine vessel off the Cuban coastline. Expect such disobedience to be practiced widely in reaction.

NOT A SUBPRIME PROBLEM ANYMORE

If 'AAA' rated mortgage bonds have lost 20% already, this is not a subprime problem anymore. My contention is that many 'AAA' bonds are likely to lose over 50% of their value, as home collateral value drops another 10%. Wells Fargo announced a whopping $1.2 billion loss from prime second mortgages recently. Remember how people could borrow their entire down payment with an immediate 20% second mortgage out of the gate? Well, they are failing, with Moodys estimating 15% of them to fail. That is on par with the horrendous subprime default rate.

The E*Trade bond loss writedowns were not subprime. After taxes and cash infusion is removed from Citadel Investments, the E*Trade fire sale salvaged only 11 cents per dollar on their $3.1 billion prime mortgage bond portfolio. The liquidation damaged the entire market by exposing its low value. This is not a subprime mortgage problem anymore. The debt ratings agencies writedowns have entered a second gear, with some acceleration. They are not only downgrading massive bank portfolios, they are threatening to downgrade the bond insurers such as ACA Capital and MBIA, as well as others. What is a house or business worth when it cannot be insured due to faulty structures? NOT MUCH!!!

FASCIST BUSINESS MODEL ENTRENCHED

However, here is where the real damage comes, as an extension of the Fascist Business Model. The sickest and often most fraud-ridden banking entities will receive fresh new money, possible USGovt handout infusions. The failures will be rewarded, leaving the successful, honest, competent to struggle or to go begging. Banks will issue fewer prime mortgages. The plan will force extreme focus on subprimes, ignoring primes.

Banks will be forced to hold back on funding new loans since old loans must be addressed. In the process, their plan will very possibly accelerate the downside for housing prices. Home inventory levels will continue to rise. Sellers will not find willing buyers so easily capable to make final their loans. The lending institutions in general will be rendered less inefficient. The most glaring example of this principle will be the capital funding of Freddie Mac and Fannie Mae. F&F are failed institutions with broken apparatuses, having operated for years without disclosure, but will dominate the national program if our current leaders have their way. Instead, new financial entities should be created, not revival of broken entities. Inefficient capital usage will be the main feature of this plan.

In my opinion, THE FINANCIAL SYSTEM HAS OFFICIALLY ENTERED CHAOS, with that chaos more widely recognized in year 2008. To be sure, it is an early stage. Massive housing losses have occurred. Even more massive mortgage bond and related credit derivative losses will occur. Rewards are being prepared for the most reckless of participants. Encouraged destruction of credit and credit ratings is possibly around the corner, so that marginal households can participate in freezes, bailouts, or whatever is handed out. Subprime loan failures are the tip of the iceberg. In 2008, the breakdown of numerous other types of mortgages will occur, already in their initial phase. They are NOT subprime mortgages.

The mortgage finance sequence of boom, bubble, bust is entering the third stage. Prices for housing properties will revert at least to where they were in 2001 when the insanity began, which was actively encouraged by Greenspan. History tells us that. His fingerprints are everywhere. All subprime mortgage bonds will go to zero in value. All CDO bonds containing subprimes will go to zero in value. All prime mortgage bonds will lose at least half their value. If the national decline in home prices falls over 10% to 15% more, then almost all recently issued prime mortgage bonds might possibly head to zero in value. Few talk about the next destructive factor for mortgage bonds.

Ultimately, a minimum of a $2 trillion bailout is necessary, as mortgage bond losses will be at least that high, especially when considering the leveraged CDO bond losses. The new bigger broader Resolution Trust Corporation must be created as soon as possible without delay. Urgency is here and now. The system is in the process of degradation, sure to lead to some increased disorder. The changes will be similar in England and possibly to some degree Spain, because they went overboard on real estate speculation. England built an economic dependence upon an inflated housing sector. Spain permitted uncontrollable vacation property speculation.

Be sure to know that Wall Street firms are in charge of the solution to a disaster that they themselves perpetrated. Wall Street firms will want to be in charge of the bailouts, even the Resolution Trust Corp. Wall Street firms will want to be involved in the grotesque bailouts, since so much corruption and opportunity will be presented. Like the parasites they are, they sense gain. Think Halliburton and the Iraq & Afghan Wars, with profits abounding to insiders on cozy contracts. Think contractors in New Orleans and Hurricane Katrina relief.

Think the next RTC administrators, with more huge profits. To even consider the fraud-ridden Freddie Mac and Fannie Mae for serving as the foundation financial agency for secondary market reinvigoration is a travesty. It is a blatant endorsement of the entrenched Fascist Business Model.

FAILED INNOVATION IN MORTGAGES

Anyone who believes the mortgage debacle is limited to subprime loans and bonds has bought hookline & sinker the story trumpeted by Wall Street and the larger banking community. The risk pricing model has broken, with authorities determined not to have the story properly. Instead, it is framed in friendly terminology, distorted to the public and the investment community. The world of bizarre reckless adjustable rate mortgages (ARM) is soon to suffer a publicly visible and horrible implosion. The aftermath of irresponsible 0% down payment mortgages is soon to suffer implosion. The innovative creative flexible mortgages are soon to suffer implosion.

No documentation, no income mortgages, unimaginable in normal cultures, are soon to suffer implosion. A vast world of under-water mortgages exists in the United States, soon to suffer implosion. The abuse of second mortgages and home equity loans is soon to suffer implosion. The main focus of attention will be on California, the center of innovation and creativity. Think the American Home Dream turning to a Ball & Chain toward serfdom, the New American Nightmare.

The key theme with innovative adjustable mortgages is their zombie nature. Resale is hindered, as is refinance, since the property is vastly under-water, loan balance greatly exceeding the home value. A return to similar mortgage loans is impossible, since they no longer exist. A loan rate freeze is a certified prescription for another zombie loan and zombie home title owner. Particular gratitude goes to ScottM in Seattle and that anonymous San Francisco mortgage broker who offered details after his personal experience in approving over $2 billion in mortgage loans himself. His information is appreciated, and needs to be made more public.

Negative amortization mortgage implosion. This type loan has permitted home title owners to pay less than the appropriate interest amount, thus adding to the loan balance. When the loans hit their maximum negative potential allowance, a huge increase is forced which could result in required monthly payments not 20% to 35% higher, but 100% to 200% higher. The full interest requirement kicks in, based upon the full loan balance, having risen. Imagine a $1400 monthly payment shooting to $2800 or $4000!

Prime second mortgages implosion. This type of loan enabled a huge number of home title owners to effectively invest 0% down payment in their original purchase. Many lending institutions have cut off further withdrawals from the home equity source, in a lockdown much like applying a tourniquet to a bleeding limb. Wells Fargo once boasted this spring not to be involved in subprime mortgages, but they possess $84 billion of these worthless loans. Expect Wells Fargo to go bankrupt. The bankrupt banks will not just have Wall Street addresses.

Pay option adjustable rate mortgage implosion. Called 'Option ARMs' in the finance industry, this category will make national news for their insanity in negative amortization features. In volume, they will greatly eclipse the subprime story, since the loan type involves all risk levels of borrowers and all sizes of properties. Again, this feature enabled many people to buy far too large a property. Shocking statistics are cited in the special report, pertaining to these truly reckless loans. Bear in mind that homes have fallen in value, so underwater percentages in extreme cases of these loans might be more than 25%!!!

Analysts estimate that on many of these Option ARM loans, home title owners are underwater by 15% to 20%. Many of these loans have seen their balances rise by 7% per year for at least three years. These loans are more disguised subprimes. The negative amortization features act like a timeduse to explode, in a situation offering no hope of refinance, no qualification for other loans, and no equity. They will go bust.

Hybrid interest only adjustable rate mortgage implosion. The hybrids attracted borrowers by offering a fixed low introductory teaser rate for a fixed three, five, or seven years. After that period, they adjust annually. Again, this feature enabled many people to buy far too large a property. The 3/1 (3-year fixed, adjust every 1 year later) began to reset in 2006, with many more in 2007. The 5/1 will begin to reset in 2008, causing a nightmare. Many lenders offered Hybrid ARMs to lower quality borrowers.

Plenty such loans did not require income verification. Like the Option ARM, the low teaser rate caused the loan balance to rise during the introductory period, thus leading to vast number of loans being under-water. Again, refinance or new mortgage loans will not be approved. They will go bust.

CONCLUSION

The downtrend in housing prices generally might actually motivate banks and other lending institutions not to make more home loans. A tidal wave of foreclosures comes soon, not related to subprime in any way, with California at the epicenter. Mortgage bond holders of above described abusive INSANE mortgage loans packaged into bonds will suffer massive losses. For some, like Option ARMs, no bond market exists anymore. The banks on the other hand will suffer from the tidal wave of loan losses, much of which is deserved. My only hope is that Wall Street banks suffer their fair share of the pain.

Home property values in some metropolitan areas are likely to fall by 30% to 50% from peak, taking them back to 2000 and 2001 levels. THE ONLY SOLUTION IS UNTHINKABLE, A NATIONAL BAILOUT OF THE MAJORITY OF HOME MORTGAGES AND MORTGAGE BONDS, SINCE THE ENTIRE SYSTEM IS BROKEN IRREPARABLY.

The effect on the USDollar and gold price is uncertain, but surely negative for the clownbuck and positive for gold. As Persian Gulf oil producers watch in horror, they will be increasingly motivated to cut their US$ formal currency pegs. The upcoming US mortgage debacle will kill the USDollar as the recognized practiced endorsed world reserve currency, with the abolition of the defacto PetroDollar standard certain. The gold price will rise amidst the absolute hurricane of low pressure asset deflation and colossal monetary inflation to fight it. THE GOLD PRICE IS CONSOLIDATING NEAR AND ABOVE 800, A DISPLAY OF STRENGTH AND RESILIENCE.

My dire forecast for 2008 is that the USDollar DX index will find its way to 65 and the gold price will find its way to $1200 per ounce. A 10% to 15% decline in the USDollar comes. A 30% to 50% rise in gold comes. The positive rub to investors is that as the national emergency becomes more widely recognized, the need to flood the bank & bond arenas, as well as the corporate credit & household arenas, will become broadly understood as desperate. Without that flood, the system will enter a deeper economic recession than already is in progress. Without that flood, the system will see the banking system actually fail.

[jimmygu3]

Re: Interest rate 'freeze' - the real story is fraud

Maybe I'm a doomer, but just about everything he says makes sense to me.

Riddle me this.: What if Fannie or Freddie or some other Gov't entity offered a one-time 8% 30-fixed mortgage or refi for anyone, regardless of credit rating, delinquency, etc. A person facing a 12% ARM reset could decide if he would be able to make the payment on the new loan or if he would be better off leaving the keys with the bank. If the latter is the case, FNMA could help the person negotiate an offer in comprimise to the bank. At that point, the bank could forgive a portion of the loan or foreclose. Banks could also choose to keep the customers at the 8% rate, rather than farm it out to FNMA.

This plan would avoid the pitfalls and narrow scope of the current subprime bailout by letting the borrower decide if an 8% (or whatever the magic number is) loan is attractive and affordable. It would be paid for by creating money (what else is new?) and would certainly shake up the mortgage industry, but so would an avalanche of foreclosures. Banks would work harder to seek out good loan candidates for mortgages below the effective 8% cap.

[jk]

Re: Interest rate 'freeze' - the real story is fraud

Maybe I'm a doomer, but just about everything he says makes sense to me.

Riddle me this.: What if Fannie or Freddie or some other Gov't entity offered a one-time 8% 30-fixed mortgage or refi for anyone, regardless of credit rating, delinquency, etc. A person facing a 12% ARM reset could decide if he would be able to make the payment on the new loan or if he would be better off leaving the keys with the bank. If the latter is the case, FNMA could help the person negotiate an offer in comprimise to the bank. At that point, the bank could forgive a portion of the loan or foreclose. Banks could also choose to keep the customers at the 8% rate, rather than farm it out to FNMA.

This plan would avoid the pitfalls and narrow scope of the current subprime bailout by letting the borrower decide if an 8% (or whatever the magic number is) loan is attractive and affordable. It would be paid for by creating money (what else is new?) and would certainly shake up the mortgage industry, but so would an avalanche of foreclosures. Banks would work harder to seek out good loan candidates for mortgages below the effective 8% cap.

the problem is the number of people who will be underwater if they're not already, i.e. their mortgages will be larger than the value of the homes.

[jimmygu3]

Re: Interest rate 'freeze' - the real story is fraud

the problem is the number of people who will be underwater if they're not already, i.e. their mortgages will be larger than the value of the homes.

Exactly. That's where partial loan forgiveness vs. the cost of foreclosure and resale of an underwater property comes into play. The banks would have the choice of taking the money or taking what's behind curtain number 2 (hint:it's made of wood and overgrown with weeds). My hunch is that they would take the money. The loan foregiveness would be a slap on the bank's and investors' wrists to discourage this behavior in the future.

[c1ue]

Re: Interest rate 'freeze' - the real story is fraud

So the government is going to offer up the money for these subsidized loans?

I don't think I would like the tax or inflation consequences of this program.

Furthermore, having a bunch of about to be foreclosed on, worth less than purchase price, refi'd into government money loans, houses is hardly a slap on the wrist for the original loan originators.

Don't forget that they get their money back; most of the payment in the beginning is interest; so long as principal returns then the banks are laughing all the work to...work.

[FRED]

Re: Interest rate 'freeze' - the real story is fraud

Interest rate 'freeze' - the real story is fraud

Bankers pay lip service to families while scurrying to avert suits, prison


Sean Olender - Sunday, December 9, 2007

New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."

Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.
Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures.

Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"

The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.

The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?

Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.

As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.

Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.

Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.

If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?

It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.

I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.

The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.

The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.

This logic is like saying shoppers seeking bargain-priced soup encourage the grocery store owner to steal it. I mean, we're talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.

Sean Olender is a San Mateo attorney. Contact us at insight@sfchronicle.com.


This article appeared on page C - 1 of the San Francisco Chronicle

Old game, no?

A set of Jobbers, rather Knaves than Fools,
Meet and contrive to Cheat their Principals;
Says on, in e’rey trade their’s some deceit,
To Bite the Biter is not Fraud but Wit.

South Sea Bubble Cards, December 1720

[metalman]

Re: Interest rate 'freeze' - the real story is fraud

Old game, no?


A set of Jobbers, rather Knaves than Fools,
Meet and contrive to Cheat their Principals;
Says on, in e’rey trade their’s some deceit,
To Bite the Biter is not Fraud but Wit.

South Sea Bubble Cards, December 1720

honestly, it's depressing how these things happen over and over.

the only saving grace... a sense of humor.

[Guest]

Re: Interest rate 'freeze' - the real story is fraud

With expose's like the "Goldman won big" article below hitting papers like the WSJ and distributed to other news outlets, it's getting a little easier to see how some version of Sean Olender's above article's described potential scenario can potentially arrive:

The catastrophic consequences of bond investors forcing originators to buy back loans at face value .... The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

_____________

http://www.gata.org/node/5840/print


How Goldman won big on mortgage meltdown

By Kate Kelly - The Wall Street Journal

Friday, December 14, 2007

<< Under Chief Executive Lloyd Blankfein, Goldman has stood out on Wall Street for its penchant for rolling the dice with its own money. The upside of that approach was obvious in the third quarter: Despite credit-market turmoil, Goldman earned $2.9 billion, its second-best three-month period ever. Mr. Blankfein is set to be paid close to $70 million this year, according to one person familiar with the matter. >>

[jk]

Re: Interest rate 'freeze' - the real story is fraud

re goldman: apparently it was a small group [2 traders] on a prop-desk who won big with the markit indices shorts. this explanation makes more sense than a conspiracy.

[Guest]

Re: Interest rate 'freeze' - the real story is fraud

Non Sequitur -

Great post by "Deepcaster" over at Financial Sense (excerpt below - looks more and more like TEOTWAWKI ) :

Full article here:

http://www.financialsense.com/fsu/ed...2007/1215.html

________

Exchange-Traded Derivatives

Exchange-Traded Derivatives soared 27% to an all-time-high $681 trillion in the third quarter 2007, according to BIS figures.

The largest single category - - Interest Rate Derivatives - - increased 31% to $594 trillion, during the third quarter.

These increases reflect a remarkable increase in risk, for many reasons, including the increased aggregate magnitude of the leverage they reflect, and the concomitant increased opportunities for counterparty default.

However, being exchange-traded, they are, to a degree visible. Yet that other main category of derivatives-over the counter (OTC) are not visible, except for the BIS and other reporting agencies disclosures. Yet the inherent risks are, if anything, greater.
Over The Counter (OTC) Derivatives

Consider the import of the data from the BIS' own website - - Review Table 19 at www.bis.org. Follow the path: Statistics>Derivatives>Table19. Note that as of December, 2006 there were:

• $6.475 trillion commodities contracts (excluding gold) outstanding
• $40.239 trillion foreign exchange contracts outstanding
• $291.115 trillion interest rate market contracts outstanding

But consider the stunning increases in OTC Derivatives in just the six months between December, 2006 and June, 2007. As of June, 2007 there were:

• $7.141 trillion in commodities contracts (excluding gold), an approx. $666 billion (10%) increase in only six months
• $48.620 trillion in foreign exchange contracts, a $8.31 trillion (approx. 20%) increase in only 6 months.
• $346.937 trillion in interest rate market contracts, a $55.822 trillion (approx. 19%) increase in only 6 months

(source: www.bis.org. Path: statistics>derivatives>Table19)

What is also obvious from a comparison invited by Table 19 - - comparing June, 2005 figures with June, 2007 figures - - is the increasing systemic threat this interventional regime imposes. Note also the dramatic jump in most categories of derivatives from June, 2005 to June, 2007.

Gold

Increases in the amounts of OTC derivatives outstanding for the Gold Market are perhaps the most stunning.

From the $359 billion outstanding at end-June 2004 they nearly tripled to $1,051 trillion at end-June 2007, an increase of approx. 290% (source: BIS “Table A - - OTC Derivatives Market, Triennial Central Bank Survey of Foreign Exchange and Derivatives market Activity”).
Note: While BIS Table 19 shows a drop in OTC

[jimmygu3]

Re: Interest rate 'freeze' - the real story is fraud

So the government is going to offer up the money for these subsidized loans?

I don't think I would like the tax or inflation consequences of this program.

ANY bailout comes at an expense, but there is a cost to inaction, as well. I haven't heard anyone (except Paulson) propose any plan at all. Who's got a better one?

Furthermore, having a bunch of about to be foreclosed on, worth less than purchase price, refi'd into government money loans, houses is hardly a slap on the wrist for the original loan originators.

Don't forget that they get their money back; most of the payment in the beginning is interest; so long as principal returns then the banks are laughing all the work to...work.

No, the banks would only get a return of principal up to the current value of the house. If the mortgage is underwater, the bank would have to renegotiate or foreclose. To me, the good part would be that the biggest garbage, underwater loans would not be fully subsidized. Irresponsible banks would have to forgive the underwater portion or foreclose and end up taking the loss on resale. The people in the middle who have decent income but who no longer have access to affordable credit would be helped. I'll break it down into levels of situations and how a program like this might affect them.

A) Homeowner with good credit, good fixed interest rate, current LTV<100%, enough income to make payments. NO ACTION REQUIRED.

B) Homeowner with marginal credit, adjustable rate resetting to higher rate, current LTV<100%, not enough income to make new payments, but enough to make payment on 8% 30yr. AT HOMEOWNER'S REQUEST, BANK CAN CHOOSE TO CONVERT LOAN TO 8% 30yr, RENEGOTIATE TERMS OR ACCEPT PAYMENT IN FULL FROM FNMA (WHO ISSUES NEW 8% 30yr LOAN).

C) Homeowner with marginal or bad credit, adjustable rate resetting to higher rate, current LTV>100%, not enough income to make new payments, but enough to make payment on 8% 30yr, based on renegotiated market value. AT HOMEOWNER'S REQUEST, BANK CAN CHOOSE TO CONVERT LOAN TO 8% 30yr AND FORGIVE THE PORTION OF THE LOAN ABOVE CURRENT MARKET VALUE, ACCEPT PAYMENT OF CURRENT MARKET VALUE FROM FNMA AND FORGIVE THE REMAINDER, OR FORECLOSE.

D) Homeowner with marginal or bad credit, adjustable rate resetting to higher rate, current LTV>100%, not enough income to make payments, even on 8% 30yr, based on renegotiated market value. BANK FORECLOSES ON MORTGAGE.

[c1ue]

Re: Interest rate 'freeze' - the real story is fraud

JG,

I understand where you're coming from.

Your scenarios below all do not speak to ability to pay, however, only towards LTV and credit status with respect to loan terms.

What we are seeing now is even prime borrowers are seeing that their already unaffordable loans are no longer justifiable in the face of flat or declining real estate prices.

If the problem is really with the gigantic numbers of Alt-A/Option ARM homeowners as opposed to subprime, the change of loan to 8% fixed would still mean drastically larger payments.

Furthermore with the drastic drop in sales, calculating 'real market value' is very difficult.

Should any house be forced to sell in the next 6 months, it is certain that the actual price will be REALLY low - perhaps even lower than 'fair' price.

Already banks are refusing to sell foreclosures at auction because they are unwilling to face the losses (to capital) that would ensue, and furthermore there are a number of anecdotal examples of new homes going for 30% less than last year.

Lastly this proposal still mucks with the MBS/CDO built upon the original loan.

The original loan assumed some high % interest (well over 8%), a very low historical default rate (circa 2005), and a large number of components.

A bank - even should it own the loan in question - would be replacing a formerly high yielding security with a much lower yielding one, without necessarily even improving the risk profile (as seen today).

Secondly any foreclosure for those with 'poor' credit would also serve to accelerate the declines in said MBS/CDOs; again which if the bank is still holding - then threaten the bank's capital ratios.

The point of all this is that more cash is needed to alleviate these bank concerns - and your proposals don't address that.