Today, we've been brutally reminded of just how sysyphean the task of easing the plight of our nation's most-affected victims of this country's economic downturn really is. On the one hand, we talk of easing (and/or correcting) the record-breaking disparity that exists between America's haves and the have-nots, circa 2010.
Roughly 1.2 million Americans are scheduled to lose their unemployment benefits, this month, alone. (Read that again, please.)
But, the diametrically-opposed reality is thus...
The U.S. "
monoline insurance" (mortgage insurance) industry is,
still, a farce comprised of a bevy of virtually bankrupt entities that have been allowed to continue to perpetrate their fraud among the homebuying public; more specifically, amongst those in the homebuying public least able to afford the continuance of yet another Wall Street charade.
From Wikipedia (link immediately above):
Mortgage Insurance
Wikipedia
Mortgage insurance (also known as mortgage guaranty) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.
For example, Mr. Smith decides to purchase a house which costs $150,000. He pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects the lender against his default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the 135,000, or $33,750, leaving the lender with an exposure of $101,250.[1] The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.
To obtain public mortgage insurance from the Federal Housing Administration, Mr. Smith must pay a mortgage insurance premium (MIP) equal to 1.75 percent of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower's behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well. The United States Veterans Administration also offers insurance on mortgages.[2]
This morning, AMBAC, one of the nation's largest mortgage insurance firms, announced that it was, for all intents and purposes, bankrupt and unable to raise investment capital: "Ambac Does Not Make November 1 Coupon Payment, To File Bankruptcy Within A Month If Unable To Raise Additional Capital."
Yesterday, I posted a diary which linked to this story: "Chris Whalen Welcomes Our New Tyrannical Overlords, Prepares For The Taxpayer Funded Mortgage Insurer Bailout."
Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time. Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent." The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...
Here's Whalen over at Institutional Risk Analytics:
Several mortgage market observers describe the current private mortgagre insurance market in the U.S. as a regulatory artifice -- or more accurately regulatory arbitrage. MI was re-created expressly for the GSEs to provide cover for loans with an LTV greater than 80%. It was a simple business and, if the management of an MI underwriter was not too stupid, it could make a decent return. The problem is that management of the old line MIs typically did a lot of very stupid things, acts of idiocy that were encouraged by the GSEs and their allies in Congress. A handful of the more egregious lapses in judgment by the MIs and the GSE included risk management changes that come under the familiar story of "innovation," a familiar ruse that was a key part of the push by both political parties for affordable housing going back decades:
(1) Eliminating independent risk management departments; line managers in the MIs were allowed to override corporate risk departments, particularly when insuring large bulk deals.
(2) Signing fraud, and documentation (completion) waivers in order to land large bulk deals from the largest producers.
(3) Insuring bulk deals without performing random inspections to (a) keep lenders honest and (b) assess underwriting quality.
(4) Insuring subprime loans (non GSE loans) without proper credit models; and insuring production from lenders with questionable credentials.
(5) Insuring large quantities mortgage product that was outside the knowledge base of the MIs. Remember that the MIs had almost 40 years of insuring plain vanilla F&F product. Now they were insuring 220's and every other kind of crappy paper the lenders threw at them. They had no clue how this stuff would perform. No attempt was made to model it properly.
Whalen tells us that by mid-2007, under George Bush's laissez-faire mismanagement of our economy, the government-sponsored enterprises (the "GSE's:" Fannie Mae, Freddie Mac, etc., etc.) started getting hit with extremely high levels of delinquencies. However, instead of cutting back on mortgage insurance services and tightening up underwriting, the mortgage insurers increased their subprime production!
...today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent.
Thus we go back to the low-income borrower, who is forced by the GSEs to pay for private mortgage insurance that will never pay out...
Bold type is diarist's emphasis.
In short, everyone in the industry knew the mortgage insurers were broke, but they've kept up with this charade, all along!
When Naked Capitalism Publisher Yves Smith discussed: "How the Banks Put the Economy Underwater," in her NY Times op-ed, yesterday, she barely made reference to this particular nightmare (one of many not even significantly discussed in the MSM of late, although Yves has covered this matter extensively over at Naked Capitalism), referring instead to...
...Other serious abuses are coming to light...
--SNIP--
The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.
Asking for Congress's help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?
There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.
The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.
The people who so carefully designed the mortgage securitization process unwittingly devised a costly trap for people who ran roughshod over their handiwork. The trap has closed -- and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.
As early as Wednesday, as I've also noted in recent posts, it is expected that the Federal Reserve will announce another round of quantitative easing ("QE"). This "QE2" effort will include, in all likelihood, massive purchases of even more fraudulent mortgaged-backed securities. (The Fed already holds well over a trillion dollars in MBS as you read this.)
The institutionalized support of our status quo, in their ongoing efforts to socialize their losses among us taxpayers, while they continue to reap scores of billions in bonuses and mark-to-make-believe, privatized profits goes on. The nation's mortgage insurance mess is just one more egregious example of how it's occurring directly on the backs of those least able amongst us to foot the damn bill.
It is time to end the ongoing, rampant fraud perpetrated throughout our country's mortgage industry in various ways, shapes and forms by Wall Street's too-big-to-fail firms and their minions. They broke it; so, they should pay for it.
And, as for Bernanke's quantitative easing, which may be announced as early as a few hours after the polls close, tomorrow, here's what economist Joseph Stiglitz just told us about this misdirected strategy: "Economist Stiglitz: We need stimulus, not quantitative easing."
On October 13th, I posted a diary which asked the following question in its headline: "Guess who's going to pay the bill for the foreclosure crisis?"
The truth is, as the International Monetary Fund just noted, we already are.
How the Banks Put the Economy Underwater
By YVES SMITH
New York Times (Op-Ed)
October 31, 2010
IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.
Bold type is diarist's emphasis.
Tomorrow, Democrats will be reminded of who's actually bearing the cost of eight years of Republican laissez-faire mismanagement of our economy, yet again.