Over the past few days, we've heard quite a bit about the level of suffering on Main Street, as the Census Bureau
announced its report on poverty for 2009. Here's Alternet.org's Joshua Holland commenting on DKos' own
Joan McCarter's FP post here, which also captured headlines over at Alternet this week: "
The Poverty Rate Has Shot Through the Roof, but the Headlines Are Only Telling Part of the Story."
I would agree with Holland, since it's now becoming quite clear that the concept of poverty--even of folks just trying to make ends meet--is something that's really quite understated throughout the MSM, and even in the blogosphere.
As some may now realize it, when it comes to the evisceration of Main Street,
the damage is done. And, as the middle and lower classes continue to suffer through the aftermath of three decades of Wall Street's unbridled greed-gone-wild,
the egregiousness of the status quo has not been curbed one iota. In fact, this diarist would contend that the MSM continues to look the other way as Wall Street's ongoing transgressions against Main Street become even
more outrageous by the day...
The Poverty Rate Has Shot Through the Roof, but the Headlines Are Only Telling Part of the Story
Alternet.org
September 16, 2010
Posted by Joshua Holland on @ 9:57 am
...As Joan McCarter (McJoan) points out below, the poverty rate has increased to over 14 percent, and income inequality is at an all-time high. These are obviously related -- the pie is only so big, so countries with more equitable distributions have lower rates of poverty.
A couple of points missing from most of the discussion of these figures. First, all of this pain is being attributed to the economic crisis that began in 2008. That's only true to an extent -- it ignores the longer-term trend of stagnating wages and rising costs that left American households so vulnerable to the recession. As I note in my new book,
Between 1973 and 2006, the U.S. economy tripled in size. In 1973, the incomes of the bottom 90 percent averaged $32,135 dollars per year (adjusted to 2007 dollars). But despite that trebling of the economy, by 2006 the bottom 90 percent had taken a cut, pulling down an average income of $31,528. Even with thirty-three years of healthy growth in the economy, the vast majority of Americans earned a bit less than they had in 1973...
The next day, HuffPo's Jason Linkins was a bit more scathing (IMHO, rightfully so) about it all: "Poverty Rate Report: The Day The Media Cared About The Poor." Here he comments about the MSM coverage...
Poverty Rate Report: The Day The Media Cared About The Poor
Jason Linkins
Huffington Post
First Posted: 09-17-10 01:05 PM Updated: 09-17-10 02:53 PM
...it was sobering news, and the brief moment of sobriety marked the annual moment where the media pays attention to poverty for a few days, before hitting the sauce again.
Diarist's Note: Then Linkins provided us with some interesting statistics in a CHART convering the MSM's mention of poverty during the week of September 11th through the 17th.
--SNIP--
...Of course, the worst of the worst when it comes to the way issues like poverty and crumbling infrastructure and massive unemployment are covered is found in the area of political reporting, where these matters take on no larger resonance beyond how they are affecting the campaign season horse race. Millions of Americans are unemployed! Well, who's up? Who's down? (Hint: It's the millions of unemployed Americans that are "down.")
Of course, this is not baseless -- once you factor in the historical forces that govern the way the electorate votes in off-year elections, it's the terrible economy that is going to be the primary factor in the way the country votes. But with the larger focus being placed on the fates of Washington elites -- will Incumbent X go from being a powerful legislator, or will he be forced to accept a life as a wealthy lobbyist or corporate board member?!? -- the coverage gets to the point where it's the politicians who get cast as the primary victims of poverty. The actual poor are just an abstract concept -- you know, like soldiers in a decade-long war or something!
Which brings me to another excellent post regarding poverty which is running over at Alternet.org, by (Democracy Now!) Amy Goodman and Arianna Huffington, entitled, "Third World America, Here We Come?" At the conclusion of it, they talk about President Obama's news conference at the White House on Wednesday...
Goodman: President Obama is holding his first news conference since the end of May today at the White House. What would you ask him?
Huffington: Well, I would ask him where is the fierce urgency of now, that he likes to quote, because that's what is needed, because people are suffering.
Finally, there was Bob Herbert in yesterday's (Saturday's) NY Times: "Two Different Worlds."
Two Different Worlds
By BOB HERBERT
NY Times
September 18, 2010
...The movers and shakers of our society seem similarly oblivious to the terrible destruction wrought by the economic storm that has roared through America. They've heard some thunder, perhaps, and seen some lightning, and maybe felt a bit of the wind. But there is nothing that society's leaders are doing -- no sense of urgency in their policies or attitudes -- that suggests they understand the extent of the economic devastation that has come crashing down like a plague on the poor and much of the middle class.
The American economy is on its knees and the suffering has reached historic levels. Nearly 44 million people were living in poverty last year, which is more than 14 percent of the population. That is an increase of 4 million over the previous year, the highest percentage in 15 years, and the highest number in more than a half-century of record-keeping. Millions more are teetering on the edge, poised to fall into poverty.
More than a quarter of all blacks and a similar percentage of Hispanics are poor. More than 15 million children are poor.
The movers and shakers, including most of the mainstream media, have paid precious little attention to this wide-scale economic disaster.
Meanwhile, the middle class, hobbled for years with the stagnant incomes that accompany extreme employment insecurity, is now in retreat. Joblessness, home foreclosures, personal bankruptcy -- pick your poison. Median family incomes were 5 percent lower in 2009 than they were a decade earlier. The Harvard economist Lawrence Katz told The Times, "This is the first time in memory that an entire decade has produced essentially no economic growth for the typical American household..."
Which all brings me to the primary point of this post. Whatever did happen to "the fierce ugency of now?" No less than half of our country, at best, is struggling just to get by. Put another way, for all intents and purposes, half of our country is, for all metrics that matter, "poor." Do you doubt this statement? (For starters, this reality may just become the "official truth" within the next year, too: "Measuring the New Poverty Measure.") Just read this piece from April, by Wall St. pundit Graham Summers via Zero Hedge (the post was pretty widely acclaimed by everyone from the Columbia Journalism Review [CJR] to HuffPo, and many in-between), and then tell me that I'm wrong in my observation: "Guest Post: It's Impossible To "Get By" In The US."
Guest Post: It's Impossible To "Get By" In The US
Submitted by Tyler Durden on 04/12/2010 11:14 -0500
Submitted by Graham Summers of Phoenix Capital Research
It's Impossible to "Get By" In the US
--SNIP--
...I thought today we'd spend some time delving into numbers for the "median" American's experience in the US today. Regrettably, much of the data is not up to date so we've got to go by 2008 numbers.
In 2008, the median US household income was $50,300. Assuming that the person filing is the "head of household" and has two children (dependents), this means a 1040 tax bill of $4,100, which leaves about $45K in income after taxes (we're not bothering with state taxes). I realize this is a simplistic calculation, but it's a decent proxy for income in the US in 2008.
Now, $45K in income spread out over 26 pay periods (every two weeks), means a bi-weekly paycheck of $1,730 and monthly income of $3,460. This is the money "Joe America" and his family to live off of in 2008.
Now, in 2008, the median home value was roughly $225K. Assuming our "median" household put down 20% on their home (unlikely, but it used to be considered the norm), this means a $180K mortgage. Using a 5.5% fixed rate 30-year mortgage, this means Joe America's 2008 monthly mortgage payments were roughly $1,022.
So, right off the bat, Joe's monthly income is cut to $2,438...
Summers continues along with his math, in pretty intensive detail I might add, to conclude:
...So even if you are extremely frugal and careful with your money, it is impossible to "get by" in the US without using credit cards, home equity lines of credit or burning through savings. The cost of living is simply TOO high relative to incomes.
This is why there simply cannot be a sustainable recovery in the US economy. Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes).
Again, please read Summers' article with all of the statistics in it to understand how spot-on Summers' assessment truly is.
So, what are we to do?
Well, we're told that we're slowly "recovering," and eventually things will be back to "normal."
We're also told that the U.S. consumer is hunkering down, and they're using credit less, paying off debt (deleveraging) and saving more.
But...wait a second! How can we be "saving more" if half of the population isn't working and/or can't make ends meet?
The obvious answer (aside from the reality that the uppermost 10%-15% of our society may, indeed, be saving more), as we just learned in Saturday's Wall Street Journal, is that this meme is totally inaccurate! Then again, since I spend all of my working time in the consumer credit world these days, I've been saying this here in the community for about two years! (I won't bore you with the links, but if you're aware of what I do for a living, you'd know that many large and mid-sized Main Street retailers throughout our country rely upon my expertise and advice about exactly this type of thing, as well.) But, don't take my word for it: "Guest Post: American Businesses and Consumers are NOT Deleveraging ... They Are Going On One Last Binge."
# # #
(Diarist's Note: Naked Capitalism Publisher Yves Smith has authorized diarist to reprint her blog's diaries in their entirety for the benefit of the DKos community.)
Guest Post: American Businesses and Consumers are NOT Deleveraging ... They Are Going On One Last Binge
Naked Capitalism
George Washington @ Washington's Blog
September 19th, 2010 2:24AM
Everyone knows that the American consumer is deleveraging ... living more frugally, and paying down debt.
Right?
Well, actually, as CNBC's Diana Olick pointed out in April, many consumers are stopping their mortgage payments, and then blowing the money they would usually pay towards their mortgage on luxuries:
I opened up a big can of debate Monday, when I repeated some chatter around that consumer spending might be juiced by all those folks not paying their mortgages.
They have a little extra cash, so they're spending it at the mall.
Some of you thought the premise had some validity, others, as is often the case, told me I was an idiot.
Well after the blog went up Erin Burnett put the question to Economist Robert Shiller, of the S&P/Case Shiller Home Price Index, during an interview on Street Signs.
He didn't deny the possibility, and added:
"In some sense there might be a silver lining in that."
Then I decided to ask Mark Zandi, of Moody's Economy.com, who will often shoot down my more ridiculous theories.
I asked him if this was a crazy idea:
No, not crazy. With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status) , this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending. The saving rate is also much lower as a result. The impact on spending growth is less significant as that is a function of the change in the number of homeowners not making payments.
I'm not sure I would say this is juicing up spending, but resulting in more spending than would be the case otherwise.
Many of these stressed homeowners (due to unemployment) are reducing their spending, just not as much as they would have if they were still making their mortgage payment.
Okay, so 6 million American homeowners are not being super frugal about either paying their mortgages or saving the money for another investment.
But surely the hundreds of millions of other Americans are reducing debt and deleveraging, right?
In fact, as the Wall Street Journal notes today, the overwhelming majority of debt reduction by consumers is not due to voluntary debt reduction, but due to defaulting on their debts and having them involuntarily written down by the banks:
The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren't making much of a dent in their debts at all.
First, consider household debt. Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve. That's an annualized decline of about 2.3%, which is pretty impressive given the fact that such debts grew at an annualized rate in excess of 10% over the previous decade.
There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Over the two years ending June 2010, banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans, according to data from the Fed and the Federal Deposit Insurance Corp.
That means consumers managed to shave off only $22 billion in debt through the kind of belt-tightening we typically envision. In other words, in the absence of defaults, they would have achieved an annualized decline of only 0.08%.
The Journal graphically shows that virtually all debt reduction is due to loan charge offs: IN THIS CHART.
Karl Denninger notes:
From a peak in 2005 of $13.1 trillion in equity in residential real estate, that value has now diminished by approximately half to $6.67 trillion!Yet outstanding household debt has in fact increased from $11.7 trillion to $13.5 trillion today.
Folks, those who claim that we have "de-levered" are lying.
Not only has the consumer not de-levered but business is actually gearing up - putting the lie to any claim that they have "record cash." Well, yes, but they also have record debt, and instead of decreasing leverage levels they're adding to them.
In short don't believe the BS about "de-leveraging has occurred and we're in good shape." We most certainly have not de-levered, we most certainly are not in good shape, and the Federal borrowing is what, for the time being, has prevented reality from sticking it's head under the corner of the tent.
Indeed, as I've pointed out repeatedly, the government has done everything it can to prevent deleveraging by the financial companies, and to re-lever up the economy to dizzying levels.
As Jim Quinn wrote last month:
You can't open a newspaper or watch a business news network without seeing or hearing that consumers and businesses have been de-leveraging. The storyline as portrayed by the mainstream media is that consumers and corporations have seen the light and are paying off debts and living within their means. Austerity has broken out across the land.
*
Below is a chart that shows total credit market debt as a % of GDP. This chart captures all of the debt in the United States carried by households, corporations, and the government. The data can be found here:
http://www.federalreserve.gov/...
Total credit market debt peaked at $52.9 trillion in the 1st quarter of 2009. It is currently at $52.1 trillion. The GREAT DE-LEVERAGING of the United States has chopped our total debt by 1.5%. Move along. No more to see here. Time to go to the mall. Can anyone in their right mind look at this chart and think this financial crisis is over?
CHART: Total Credit Market Debt As A % of GDP.
During the Great Depression of the 1930's Total Credit Market Debt as a % of GDP peaked at 260% of GDP. As of today, it stands at 360% of GDP. The Federal Government is adding $4 billion per day to the National Debt. GDP is stagnant and will likely not grow for the next year. The storyline about corporate America being flush with cash is another lie. Corporations have ADDED $482 billion of debt since 2007. Corporate America has the largest amount of debt on their books in history at $7.2 trillion.
Indeed, as this chart courtesy of Zero Hedge confirms, traditional banking liabilities are higher than ever:
CHART: Shadow Bank Liabilities vs. Traditional Bank Liabilities ($BN)
Granted, the liabilities of the shadow banking system have fallen off of a cliff.
But Tyler Durden argues:
The latest plunge in the shadow banking system is merely the most recent confirmation that the deleveraging in America is only just beginning.
So what does it all mean?
The government, big financial companies and the American consumer are all guilty of fighting deleveraging instead of voluntarily paying down their debt.
Like a junkie looking for "one last score", the entire country has sold out our future to try to keep the artificial high going a little longer.
As I pointed out in July 2009:
Every independent economist has said that too much leverage was one of the main causes of the current economic crisis.However ... the Federal Reserve and Treasury have, in fact, been encouraging massive leveraging.
*
Economists pushing voodoo theories justifying the tremendous increase in leverage were promoted and lionized, while those questioning such nonsense were ridiculed.In other words, economists and financial advisors - in academia, government and elsewhere - have been subservient to the financial elites, and have trumpeted the safeness and soundness of cdos, credit default swaps, and all of the rest of the shadow economy which allowed leverage to get so out of hand that it brought the world economy to its knees.
This is no different from the promotion of sports doctors to become team doctor when they are willing to inject various painkillers and feel-good drugs into an injured football star so he can finish the game. If he is willing to justify the treatment as being safe, he is promoted. If not, he's out.
Economists have acted like team docs for the financial giants. When the football team doctor who gives the injured patient steroids and stimulants and tells him to get back in the game, it might be good for the team in the short-run, but the patient may end up severely injured for decades.
When economists have prescribed more leverage and told the banks to go trade like crazy to get the economy going again, it might be good for the banks in the short-run. But the consumer may end up being hurt for many years.
Using another analogy, this is like prescribing"hair of the dog" to the suffering alcoholic or heroin to the withdrawing junkie.
And as I wrote in August 2009:
In an essay entitled "The risk of a double-dip recession is rising", Nouriel Roubini affirms two important points:
This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest...
The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.
In other words, Roubini is confirming what Anna Schwartz and many others have said: that the problem is insolvency, more than liquidity, that the government is fighting the last war and doing it all wrong, and that we should let the insolvent banks fail.
Roubini is also confirming that incurring huge deficits in order to have the federal government itself act as a super-bank is causing a reduction in -- and "crowding out" a recovery in -- private sector spending. (Roubini also said last year: "Deleveraging requires the writing down of debt as reflationary policies are not a free lunch and won't solve the debt overhang problem").
As I have repeatedly pointed out, a recovery cannot occur until we move through the painful deleveraging process. But instead of allowing this to occur, the government is trying to increase leverage as a way to try to re-start the economy and save the insolvent banks. See this, this and this.
Of course, all of the massive government spending might also be putting
governments themselves at risk . . . but that is another story.
# # #
Meanwhile, as we slowly acknowledge the reality that HALF of the country is in various stages of poverty, the uber-wealthy are telling us it's not easy getting by on...$900,000 an hour! (See: "Poverty Is Through the Roof, and Billionaires Are Getting Pissy About Not Enough Profits.")
Poverty Is Through the Roof, and Billionaires Are Getting Pissy About Not Enough Profits
AlterNet / By Les Leopold
September 17, 2010
...While 43.6 million Americans live in poverty, the richest men of finance sure are getting pissy.
--SNIP--
Why are Wall Street's billionaires so whiny? Is it really possible to make $900,000 an hour (not a typo -- that's what the top ten hedge fund managers take in), and still feel aggrieved about the way government is treating you? After you've been bailed out by the federal government to the tune of $10 trillion (also not a typo) in loans, asset swaps, liquidity and other guarantees, can you really still feel like an oppressed minority?
--SNIP--
For the last thirty years we've been told that making as much as you can is just another way of advancing the common good. But the Great Recession erased that equation: The Wall Streeters who made as much as they could undermined the common good. It's time to balance the scales. This isn't just redistribution of income in pursuit of some egalitarian utopia. It's a way to use public policy to reattach billionaires to the common good.
It's time to take Eisenhower's cue and redeploy the excessive wealth Wall Street's high rollers have accumulated. If we leave it in their hands, they'll keep using it to construct speculative financial casinos. Instead, we could use that money to build a stronger, more prosperous nation. We could provide our people with free higher education at all our public colleges and universities -- just like we did for WWII vets under the GI Bill of Rights (a program that returned seven dollars in GDP for every dollar invested). We could fund a green energy Manhattan Project to wean us from fossil fuels. An added bonus: If we siphon some of the money off Wall Street, some of our brightest college graduates might even be attracted not to high finance but to jobs in science, education and healthcare, where we need them.
Of course, this pursuit of the common good won't be easy for the billionaires... --SNIP-- ...They're going to have to learn to live on less than $900,000 an hour...
Perhaps much worse, Wall Street's transgressions (against those needing help from the government most) are getting to the point where banks (and their legal minions) are committing out and out fraud as foreclosures escalate. In quite related instances, they're contorting mortgage documents to put the traditional onus of proof of ownership (the very ability to sell the home) on the buyer! Here are two examples, from JP Morgan Chase and Wells Fargo, of what's playing out in courtrooms and mortgage closings throughout America, as we blog (and it's too damn late for Elizabeth Warren, or any consumer watchdog for that matter, to do anything about it when consumers/homeowners desperately need our government's help right now):
JPMorgan Chase...
JPMorgan Brings Foreclosure Case In Mortgage In Which It Was Just A Servicer, Court Finds Bank Committed Fraud
Zero Hedge
09/16/2010 16:37 -0500
An interesting development out of Jean Johnson, Circuit Judge in Duval Country, Florida, where in a case filed by JPMorgan/WaMu, as Plaintiff, and law firm of Shapiro and Fishman, attempted to evict defendants Hank and Marilyn Pocopanni. As basis for the legal case, WaMu had submitted an assignment of mortgage, which however the court just found never actually belonged to WaMu, and instead was carried on the books of Fannie Mae. Once this was uncovered is where this case gets really interesting: In point 5 of the filing we read that the "plaintiff predecessor counsel made "clerical errors" when it represented to the Court that the plaintiff was the owner and holder of the note and mortgage rather than the servicer for the owner." Which means that only Fannie had the right to foreclose upon the Pocopannis, yet JPM, as servicer, decided to take that liberty itself. And here the Judge got really angry: "The court finds WAMU, with the assistance of its previous counsel, Shapiro and Fishman, submitted the assignment when [they] knew that only Fannie Mae was entitled to foreclose on the Mortgage, and that WAMU never owned or held the note and Mortgage." And, oops, "the Court finds by clear and convincing evidence that WAMU, Chase and Shapiro & Fishman committed fraud on this Court" and that these "acts committed by WAMU, Chase and Shapiro amount to a "knowing deception intended to prevent the defendants from discovery essential to defending the claim" and are therefore fraud. While the Judge in this case did not also find declaratory damages against the plaintiff, and while the case of the defendants is unclear (we would expect Fannie to file a foreclosure act on its own soon enough), the question of just how pervasive this form of "fraud" in the judicial system is certainly relevant. Because if JPM takes the liberty of foreclosing on mortgages as merely servicer, when it has no legal ground for such an action, who knows how many such cases the legal system is currently clogged up with. The implications for the REO and foreclosures track for banks could be dire as a result of this ruling, as this could severely impact the ongoing attempt by banks to hide as much excess inventory in their books in the quietest way possible...
Wells Fargo...
# # #
(Diarist's Note: Naked Capitalism Publisher Yves Smith has authorized diarist to reprint her blog's diaries in their entirety for the benefit of the DKos community.)
Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers
Yves Smith
Naked Capitalism
September 18, 2010 4:42AM
Another ticking time bomb in the realm of real estate bad behavior is bound to go off sooner rather than later, and it is likely to impede normalization of values of residential property.
As readers no doubt know, there is a lot of actual and shadow residential real estate inventory in the US. The time from serious delinquency to foreclosure has lengthened considerably, due not just to crowded court dockets, but also bank/servicer disinclination to take possession (reasons include that investors take a dim view of bank real estate holdings; the bank is liable for expenses, most important real estate taxes, once it takes possession; more foreclosures would lead banks to have to write down clearly overvalued second mortgages, leading to losses and lowering bank capital levels).
Most analysts have argued that it would be preferable to accelerate the process of clearing the overhang of housing inventory, since prices need ultimately to return to price level in relationship to incomes and rent rates more in line with long standing historical norms. And the officialdom seems to accept this view, since Fannie and Freddie are pressuring servicers to move faster on foreclosures.
But what if this resolution process has new land mines planted in it? What if there are not widely understood impediement to foreclosed properties ending up with new owners? If there are good reasons buyers will have reason to be leery of buying houses out of foreclosure, we could have a lot of homes sitting vacant, a blight on neighborhoods and a source of even greater losses to banks and investors.
Yet it appears that the very same sort of corners-cutting that led financial firms to shovel money to weak borrowers could impede working through the inventory of seized residential real estate. An article discusses an analysis by AFX Title, a title search company, that shows problems with title on foreclosed properties to be widespread:
As the number of real estate foreclosures skyrockets, the odds are higher that a home you live in today, or at some point in the future may have had a foreclosure in its history. Even if the foreclosure has long since passed, a loophole in the way mortgages are recorded can create a serious title defect for future owners. Title analysis performed this month by AFX Title has detected this error to be common in random samples of properties it reviewed. "This could affect the property ownership of millions of homes nationwide" said David Pelligrinelli, of AFX Title. "The mortgage recording method which created this title flaw did not exist until recently. As title abstractors are just seeing this problem emerge now but a wave of title claims is coming over the next year or so."....
The problem is created through a break in the chain of mortgage ownership. Until the 1980's, most mortgages were loans between the homeowner and a bank, who lent the money directly. More recently, the mortgage financing system transformed into an international system of securitization, with mortgage lenders packaging their loans into securities, bought and sold by investors like stocks. These transactions even split individual mortgages into sections, where each loan could have parts owned by different investment banks.
The transfer of ownership in these mortgage backed securities (MBS) was done with contracts on the balance sheets of Wall Street investment banks, such as Morgan Stanley and Goldman Sachs. The company who originally appeared to make the loan was normally a retail lending company such as Countrywide or Lending Tree, who typically acted as a sales company, and sometimes remained contracted to service the loan.
In the event that the loan goes into foreclosure at a later date, the then-current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The land records would show a deed of transfer from the investment bank to the new owner. This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place...
There are reports that some title insurers are indicating that they will not insure for this title defect.
Yves here. Some readers may take this all to be unduly alarmist. But confirmation that this problem is real and potentially serious comes via a new "gotcha" practice by Wells Fargo on foreclosure sales. Wells is sufficiently concerned about the risks of selling properties out of foreclosure that it is springing an addendum on buyers, shortly before closing, which effectively shifts all risk for any title deficiency on to the buyer.
Now why is this a big deal? Go reread the boldfaced sentence above. If a bank like Wells does not have the right to foreclose, it cannot have clean title to the property. So the bank could conceivably be selling something it does not own.
Let's say you buy a vase from a store. You open the box when you get home and find out the box is empty. You'd clearly be within your rights to get your money back.
With the Wells Fargo addendum, even if the bank has sold you the equivalent of an empty box, you have no recourse to Wells. Zero. Zip. Nada.
Let's go back and give a bit of context. Wells is encouraging buyers in foreclosures to use its attorney and title insurers and reportedly offers to split fees. So the bank is taking steps to steer buyers not to get legal advice. This matters because the problems in this document would not be evident to a layperson. And it's not even evident to lawyers not expert in real estate; I learned about this situation because a lawyer I know who does a fair bit of real estate work had been contacted by a friend of his, a lawyer looking to buy a house over foreclosure. Wells had presented the prospective buyer with this supposed "standard" addendum on the day of closing and said they would not negotiate it (you can read it in full at ScribD). The buyer was advised not to sign it.
On the surface, this document may not seem all that troubling. But what it does, in effect, is say "Warning, warning, you are buying a property out of foreclosure, there is risk here, and you can't hold us responsible for anything we told you in the sale process." (see paragraphs 1 and 2). Now the not-trivial problem with that is: how can you possibly evaluate the risk of buying a property out of foreclosure without asking the current owner? And if the current owner isn't legally responsible for what they say, or more important, what they deny is a problem, they buyer cannot perform effective due diligence. This vitiates a principle that is well embodied in most areas of consumer and business law, that a seller is liable for the representations he makes about his wares.
Now specifically, the potential problem with the deal is the bank in many states will at best be giving the buyer a "quitclaim" deed (the addendum finesses this in paragraph 18, that the buyer only gets a "special/limited warranty deed. As the lawyer who took a dim view of this addendum put it, "This is like the `Special Olympics,' not like `You are my special someone'." That means the bank is merely transferring whatever it interest it has.
But per the AFX article above, the bank may own nothing. It may have foreclosed without having a clear enforceable right to the property (this is the basis of the burgeoning number of cases where borrowers are successfully challenging the bank/servicer's right to foreclose, because it cannot prove it actually owns the note, which is the IOU between the borrower and the lender; if you don't own the note, in 45 states, you have no right to enforce the lien on the property).
Now this little problem can be solved by title insurance, right? Well, guess what, some title insurers have exited the business, some others are starting to write policies with meaningful exceptions when they can't go to the courthouse and find a clear chain of title. Oh, and Wells is trying to steer you towards their title insurer. What do you think the odds are that their title insurance policy doesn't have exceptions?
So what is the risk? The lawyer explains:
The typical (unsophisticated) buyer thinks that because they have a lawyer at closing (no matter whose lawyer it is), a title policy, etc.......that they are all safe and sound. They struggle through one of these REO transactions for a month or two, finally get in the house, something bad goes wrong, and they find out that 1) the title policy won't cover them and 2) the land isn't unique (see the nasty provision in paragraph 27 on "specific performance"), so a refund is all you get - and you are out on your ear. Hopefully, with a refund - and that may be the best outcome. But if somebody comes in, and voids a foreclosure, your title policy doesn't pay - Wells Fargo has clearly disclosed that this was a foreclosure, so you only got what they had (nothing), and you have no recourse, no insurance, and guess what, an unsecured loan for half a million bucks.
Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.
Think the risk isn't real? Then why has Wells bothered to insist that REO buyers sign a new type of addendum, when it has been selling REO for decades? This effort to shift all title risks on to the buyer is a tacit admission of problems. And look at the document itself. The buyer has to initial it in eight places as well as sign it. That's a clear statement of Wells' intent to shift the risk to the buyer.
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Yes, the political kabuki very much continues; but then there are the truly harsh everyday realities, discussed above, at least as Glenn Greenwald reminds us of them, from Friday, when the President addressed his base, at a $30,000-per-plate DNC fundraiser, in Greenwich, Connecticut.
Clearly, when everything's said and done, the truest meme (and the biggest lie) is that Wall Street is Main Street's friend, and "liberals" are the enemy.
That is what we are to believe, anyway.
According to our Party's leaders, it's time for all Democrats to get with that program, and Party on...