Karl's on a roll these days...
A Panoply Of Fraud (And Other Things)
Hope you don't need your dictionary for the title....
I will focus today on fraud that is legal (at least so far) and point out just a few (more) examples - a few more items that should drive you to outrage.
Will they? History says no, but Don Quixote needs his windmills.....
Let's start with the simple - "Down Payment Assistance". There is yet another of these "charities" that is circulating petitions to try to get this scam restored - a scam that the recent homeowner "assistance" bill killed (one of the good elements of that bill.)
Let's talk about why this "program" is in fact a fraud upon the public - no matter who the provider is.
Let's take a hypothetical $100,000 house you own. You put it on the market for $100,000.
A "buyer" comes to you and has no down payment, and thus can't qualify for an FHA loan (which requires 3% down.)
You take a $100,000 contract on the house.
But you don't get $100,000. You "agree" to make a "donation" to the DPA company in the amount of the $3,000, plus an "administration fee" of, say, another $950.
So you received, in fact, $96,050 for the house. But of course you paid 6% (real estate commission) on the full $100,000, not on the $96,050! Your Realtor loves this little scam since he makes more money.
From the buyer's perspective, they paid $97,000 for the house; they got $3,000 from the seller. The buyer likes it too, although in fact he probably got screwed, because the seller is less likely to reduce his price and pay the bribe, er, graft, er, "assistance".
But wait - what is the price recorded at on the HUD-1? Ah, there's the rub, eh? The HUD-1 shows a $100,000 transaction! So does the lender, so does the title transaction, etc.
So everyone else in the neighborhood now has a "comp" on the house for $100,000, which pumps the price of their houses by 3%, and the lender is instantaneously upside down by 3% and change, as the actual value of the home is $96,050.
The actual sales price of the house wasn't $100,000.
This sort of intentional false statement is supposed to be illegal. In fact, it is supposed to be a federal offense. But through this "loophole" hundreds of billions of dollars has flowed, with many "charities" making plenty of money (and paying very nice salaries) to their executives and employees.
Laundering the money through a third party doesn't change the fact that what really happened was a nearly $4,000 seller's concession on the sales price, with the "charity" grafting off almost a quarter of it!
Yeah.
Worse, FHA has that 3% rule to insure that you have some skin in the game and can manage to save the 3%. Of course this "no money down" program voids that part of their program, so now one of the principles of soundness and safety of long-term lending - that you can manage money well enough to save up a down payment - has been destroyed.
These so-called "charities" are, in my view, nothing of the kind. A 501c(3) must exist for bona-fide charitable purposes. What's "charitable" about intentionally misrepresenting the sale price of a house and destroying one of the pillars of sound mortgage lending?
Where are the cops - in this case, the IRS?
Next up, you'd think that with mortgages getting harder to get and underwriting tougher, fraud would be on the decrease, right? You'd be wrong.
The study found that the number of fraudulent loans issued during the first three months of 2008 skyrocketed 42% compared with the same period in 2007.
The big jump was a surprise even to MARI. "We were stunned," said spokeswoman Jennifer Butts. "It shows that some folks [in the industry] are desperate."
....
The most common type of fraud that MARI found pertained to employment history and income. Many applications exaggerated how much borrowers earned and misrepresented their job descriptions.
The biggest increase came from a jump in the number of undisclosed or incorrectly reported debts, liens and judgments.
No, really? You mean that we've had an "industry" full of snakes for the last eight years and everyone expected that they'd just quietly slink into the night and quit being snakes when the money started to dry up?
Oh, and it doesn't help that The Bush Administration decided that "fraud for housing" - that is, lying in order to buy a house to actually live in, wouldn't be prosecuted (even though its a felony.)
Guess who pays for this nonsense? You and I - through higher borrowing costs.
If that's not enough Bloomberg reported yesterday that Lehman is "mulling over" the idea of creating a new company that it will then dump its mortgage assets into with Lehman claiming that the company will be "funded by outside investors."
Uh huh. Like the last few of these so-called "sales", made no-recourse with the seller holding the note and only a "small" down payment? Sale eh? Why do the accounting people, the auditors and the SEC allow this sort of blatant fraud? Now we're going to play "SIV" once again? Or try to anyway, it would appear....
The punch line is of course buried in the story:
"Lehman may contribute some of the equity for the new venture so it could benefit should asset prices recover, the people familiar with the talks said."
There 'ya go.
Where are the cops?
Now let's turn to The Fed. The "minutes" (a fraud in its own right, as what's released aren't minutes at all; they are in fact a press release sold as "minutes") were released yesterday and of course they revealed what we already know.
But buried in there is the old statement that "inflation will moderate over time."
Except it hasn't.
For two years.
For two years now core inflation has been "expected" to moderate over time, as it has been above target, and in every Fed Statement and "minutes" the same tired refrain has been repeated. In fact, the Dallas Fed's President was out this morning repeating this mantra again, as if shouting louder will suddenly make it happen.
Core inflation has actually increased, not decreased, and The Fed has added, rather than removed, liquidity into the reality of life for Americans.
In short, once again, fraud. Legal, but fraud nonetheless. You, America, seem to think this is just great as your grocery and gas budgets get squeezed.
You must think its great for your budget and lifestyle to get reamed, since I've yet to see a groundswell of people in Washington DC protesting or our city streets swarming with people who refuse to leave and shut down commerce.
Oh, and how about media reporting on new home sales?
"The heavy pace of foreclosures has also been a major force pushing home prices lower, as lenders aggressively price their backlogs of repossessed real estate, hoping to unload them before prices fall further. Once the pace of foreclosures begins leveling off, the pressure on prices will ease. "
That would be an outright lie.
See, in certain markets (parts of California for one) there were more foreclosures recorded - that is, completed - than there are houses in the MLS + sales!
How can that be?
How, may I ask, can you possibly foreclose on more homes than are newly listed and sold combined?
Where did all those foreclosures go, if they were neither sold or listed for sale? Are you going to try to tell me that they simply disappeared in some Martian's magical raygun?
The truth is simple and inescapable - the banks are holding inventory back rather than sell them, probably in an attempt to prevent being forced to recognize their losses!
See, if they sell the house then its an instant "mark to market" at the sales price. But if they don't sell it, well, that's not a loss, right?
So the "months of inventory" are a lie and so is the median price, since supply is being intentionally held back to distort the market along with bank balance sheets.
That, of course, wasn't reported.
This same story DID tell part of the truth on consumer confidence, to its credit:
"Consumer budgets are also being squeezed by higher food and energy prices, though household budgets have recently gotten something of a reprieve as gasoline prices have eased. That helped lift overall consumer confidence a bit in July, though the outlook for jobs turned bleaker, according to the latest monthly survey from The Conference Board. "
The outlook for jobs - part of confidence - wasn't reported on bubblevision, but the headline number sure was.
Surprised? Not me.
Of course when this sort of "legal" fraud is ignored for years, you also get truly outrageous behavior, like this:
Citigroup's "account sweeping program" automatically removed positive balances from customers' credit card accounts, Attorney General Edmund G. Brown Jr. said. For instance, if a customer double-paid a bill by mistake or refunded a purchase for credit, that positive balance was then taken from the customer without notification, Mr. Brown said.
Nice. Of course Citigroup claims they "voluntarily" stopped the practice.
The better question is why they started doing it in the first place, and why this sort of thing doesn't result in revocation of the bank's charter to operate a credit card business.
Never mind this quote....
"In the words of a Citibank executive, “Stealing from our customers is a business decision, not a legal decision.” The same executive later said that the sweep program could not be stopped because it would reduce the executive bonus pool, Brown charged."
I see.....
Let me know when y'all get mad enough to do something about all this nonsense..... (funny how during the Democratic Convention last night the buzz was all about the second round of sore loserman with Hillary delegates rather than the outright theft and fraud from the people that the party supposedly claims to be most-closely aligned with!)
Now, onto Treasury. You haven't heard that department talked about much, other than in the context of bailing out Fannie and Freddie, but you should be hearing about it.
Treasury is absolutely flooding the market with new issues and rollovers. Why? Well the government is spending like a drunken sailor in a whorehouse, and guess what - to do that they have to sell Treasuries! We're talking about a "run rate" over the last few weeks (and the next couple) that, if extrapolated, would result in more than $700 billion added to the Federal debt!
Now we all know that Congress raised the debt ceiling and that in general we as a nation are in it (debt, that is) up to our eyeballs as a nation, but what is little-appreciated by the "market commentators" is that it is the credit markets that really set the tone, not the stock market.
Here's the problem - when you issue bonds like this you soak up money which must be collected in exchange for those bonds. As a consequence there is a net withdrawal in liquidity and, all things being equal, coupon rates rise while treasury prices sink.
This "transfer" of free money from the market to the Treasury (which then wastes, er, spends it) tends to put downward pressure on stock prices (duh.)
See, the government spending too much does hurt your 401k! Not only do you get price inflation but you also get lower stock prices. Do you think the government bothers to tell you this?
Oh hell no.
One final note - yesterday afternoon the FDIC released its latest "troubled bank" numbers.
"Total assets of troubled banks jumped from $26 billion to $78 billion in the second quarter, the FDIC said, with $32 billion of the increase coming from IndyMac Bank, which failed in July -- the biggest regulated thrift to fail in the United States."
What they didn't mention is that $78 billion is considerably more than the FDIC has.
Yes, I realize that not all of those "assets" will be zeros or even be impaired, but IndyMac is now recognized to be an $8 billion problem (of course the number keeps going up) and worse, the FDIC is now below regulatory capital limits and thus will be forced to raise insurance premiums, further stressing member banks.
Has the FDIC been "realistic" in the rest of its reporting? Probably not.
That's the next bailout, and guess who's going to get the bill.
Yep.
Durable goods came in much stronger than expected today. Beware this number, however, as there are some facts you need to pay attention to.
First, computer orders were down 10%. That's a leading indicator on hiring (think; the reason should be obvious!) in the white-collar (read: nice-paying jobs) space.
A large part of the increase was due to aircraft orders. These have a very long lead time and are subject to cancellation.
Machinery orders were up very strongly; most of this is due to "pull forward" provisions in the stimulus bill that accelerated expensing of items otherwise depreciated. This has a major but short-term impact (this isn't the first time the government has done this; I personally benefited from it in the 90s) but the important thing to remember about it is that pulling forward demand means that in the out months you get rammed as the total spending hasn't changed, just the timing.
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