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Generational Dynamics Web Log for 19-Oct-2010
19-Oct-10 News -- Analyst John Mauldin is turned by the foreclosure issue

Web Log - October, 2010

19-Oct-10 News -- Analyst John Mauldin is turned by the foreclosure issue

The geography of the recession

Countrywide's Mozilo settles with SEC as foreclosure crisis expands

Former Countrywide Financial CEO Angelo Mozilo agreed to a $67.5 million settlement to avoid trial on civil fraud and insider trading charges, according to AP.

Countrywide was once the largest US mortgage lender. During the period 2003-2006, Countrywide adopted a series of risky lending practices, in order to expand its asset base. Many of the mortgages required no down payment, and were adjustable rate and interest-only loans, according to Reuters.

Countrywide grew exponentially during that period, but by 2008, about one in 11 borrowers overall and more than one in three subprime borrowers had fallen behind on home loan payments. Bank of America acquired Countrywide in 2008, at fire sale prices.

Mozilo's settlement with the SEC was for civil fraud charges. Mozilo also faces charges of criminal fraud that have yet to be resolved. The fraud charges are that Mozilo claimed in 2007 that his mortgage business was rock solid, when he already knew that it was falling apart. None of this will be a surprise to long-time readers of this web site.

This settlement comes at a time when a new scandal, known as the "foreclosure scandal," is beginning to appear and could last for years, according to a recent article by Bloomberg.

It's almost hilarious to read about this -- if only the consequences weren't so great.

As I've written many times, the financial crisis could not have occurred while the Silent generation, the survivors of the Great Depression and WW II, were in charge. The crisis began seriously with the tech bubble in the late 1990s, when the members of the Silent generation were disappearing, all at once, leaving Boomers in charge.

The tech bubble was bad, but what happened next was a million times worse, and was caused by the unique relationship between the nihilistic, greedy Generation-Xers and their bosses, the incompetent, greedy Boomers. In financial institutions around the world, young "financial engineers" created and sold structured securities that later turned into toxic assets. Their Boomer bosses were too incompetent to stop this and besides, they were all making too much money.

An important piece of that fraud was subprime mortgages. Companies like Countrywide churned out millions of these mortgages as a kind of mortgage mill. It was easy, since almost anyone could get an interest-only or adjustable rate mortgage with no credit check, no assets, no income, and no hope of paying the mortgage off.

As I keep repeating on this web site, nothing has changed since 2006. Exactly the same people are still in pretty much the same jobs they were in in 2006, and they're still committing the same kinds of fraud, but it's been adapted for the times.

The new "foreclosure crisis" is being largely caused by the fact that proper ownership of the foreclosed homes can't be established, because the mortgage mills that created the mortgages in the first place were very sloppy. Many of the steps that a bank would have taken prior to 2000 in granting a mortgage were skipped during the frenzy from 2003-2008. Now banks are running into trouble because they didn't do the original paperwork necessary to process a foreclosure today.

Banks have tried to replace the original mortgage mill with a new foreclosure mill. The mortgage mill worked because everyone was making money, for a while. The foreclosure mill is in trouble because everyone is losing money, and willing to fight in court.

For those who would like additional details about the details of how the foreclosure mess is spreading, see the fascinating article by John Mauldin referenced in the following report.

In particular, read the part about how the sloppy paperwork by the mortgage mills created errors in "chain of ownership" of the mortgage notes, and how the new foreclosure mills are trying to repair those errors with fraudulent paperwork.

The same people who defrauded the public in the mortgage mills are still in business, defrauding the public in the foreclosure mills. The financial crisis is far from over.

John Mauldin turned by foreclosure issue

I've criticized financial columnist John Mauldin in the past for writing Pollyannaish nonsense about future stock market growth and the economy. In particular, as I described in "Blogger watch: Mish Shedlock goes gloomy, while John Mauldin gets muddled," Mauldin wonders why price/earnings ratio can't always just remain above average -- just like the children in Lake Wobegon.

In Mauldin's new newsletter, he appears to be finally grasping the seriousness of the problem, and the event that seems to have changed his thinking is the current foreclosure crisis. He says the following:

"We are going to quickly review a few charts from Gary Shilling's latest letter, where he review the housing market in depth. Bottom line, the housing market has not yet begun to recover, and it is not only going to take longer but the decline in prices may be greater than many have forecast. I wrote three years ago that it could be well into 2011 before we get to a "bottom." That may have been optimistic, given what we will cover in this letter."

Now let's be clear: Mauldin uses the word "may" throughout this paragraph, but he wouldn't even be suggesting these gloomy things if he weren't certain they were coming. Using the word "may" is just the way that all these analysts use to cover all the bases, to protect themselves so that they can say that they were right, no matter what happens. As long-time readers know, this is something that I rarely if ever do.

Here's one of the charts that he refers to:

New and existing home sales, January 2006 to present <font size=-2>(Source: Gary Shilling)</font>

New and existing home sales, January 2006 to present (Source: Gary Shilling)

As this chart shows, home sales have been on a steady downward trend since the real estate bubble began bursting at the end of 2005. There was a spike upward in existing home sales in the last year, thanks to the stimulus programs and the federal home-buyer's tax credit. But, as you can see, with both of those expiring, existing home sales have returned drastically to the falling trend line, and new home sales never got a boost anyway.

That brings us to the current foreclosure scandal.

Mauldin quotes a personal letter he received from Cumberland Advisors founder David Kotok. The letter spells out in great and gory detail exactly what's going on in the current scandal in which banks have been forced to stop foreclosing on homes because of insufficient paperwork.

When the mortgage mills were operating prior to 2008, the paperwork was sloppy, and rules about "chain of ownership" of the mortgage note were not always followed. According to the analysis in Mauldin's newsletter, if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

And now it turns out that the banks have been fraudulently creating backdated paperwork to repair the chain of title.

As I keep saying, the same people who committed the original fraud when the mortgage mills are operating, and now defrauding the public again now that the foreclosure mills are operating.

And it appears that the foreclosure crisis is so serious, that even the Pollyannaish John Mauldin is saying that the situation "may" be worse than he thought.

From the point of view of Generational Dynamics, the financial crisis is far from over, and far worse is to come. The foreclosure mess sprang from nowhere within a few weeks, and is now appearing to be the next step in the evitable progression to financial calamity.

The geography of the recession

The interactive graph by labor writer LaToya Egwuekwe on this page shows how unemployment has grown since 2007 to the present on a county by county basis.

The following is a video of the same graph:

This video shows that unemployment has been on a steadily increasing trend, even through the period of huge bailouts and fiscal stimulus. As we've been saying for years, Generational Dynamics predicts a new 1930s style Great Depression, and nothing can be done to prevent it.

Additional links

On Monday, Mexican soldiers seized 105 tonnes of marijuana in Tijuana, with a U.S. street value of more than $340 million. Troops found the narcotics wrapped in 10,000 brown and silver packages in houses and a parked truck. The marijuana was brought together from across Mexico over several months and bound for the United States. Reuters

During the enormous floods that swept down Pakistan last month, thousands of refugees fled to the country's commercial capital, Karachi, destabilizing the city. At least 33 people were killed in weekend attacks that coincided with a regional election. As a result, one political party, the Muttahida Qaumi Movement (MQM), part of President Asif Ali Zardari's governing coalition, is threatening to pull out of the coalition, possibly toppling his government. By the way, former president Pervez Musharraf, who is exiled in London but has stated his desire to return to Pakistan and run again for president, is a member of the MQM party. Reuters

In France, labor union strikes are gathering momentum, and are threatening to shut the country down completely, as the strikers oppose raising the retirement age from 60 to 62. President Nicolas Sarkozy insists that he will press ahead with pension reforms, despite the strikes. Attempts by Sarkozy's predecessor, Jacques Chirac, to reform the labor laws in 2006 triggered a massive strike that forced Chirac to back down, and during the subsequent election, Sarkozy was very critical of Chirac's actions. Sarkozy has previously expressed contempt for the strikers, so it would be politically disastrous for him to back down, despite the fact that a poll finds that 71% of those surveyed support the strikers. A vote on the pension reforms is scheduled in the French Senate for Wednesday, but left-wing senators have submitted hundreds of amendments in an attempt to delay the vote and give the strikers more time. BBC

The Palestinian leadership, in conjunction with the Arab states, are going ahead with plans to ask the United Nations and request an international mandate creating a Palestinian state, based on Israel's pre-1967 borders. Haaretz

(Comments: For reader comments, questions and discussion, see the 19-Oct-10 News -- Analyst John Mauldin is turned by the foreclosure issue thread of the Generational Dynamics forum. Comments may be posted anonymously.) (19-Oct-2010) Permanent Link
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Generational Dynamics Web Log for 19-Oct-2010 19-Oct-10 News -- Analyst John Mauldin is turned by the foreclosure issue

Countrywide's Mozilo settles with SEC as foreclosure crisis expands

John Mauldin turned by foreclosure issue

The geography of the recession

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Generational Dynamics Web Log for 19-Oct-2010
19-Oct-10 News -- Analyst John Mauldin is turned by the foreclosure issue