Mish's Global Economic Trend Analysis

40 State Attorneys General to Investigate Mortgage Fraud; Bank of America Halts Evictions Nationwide; Senator Reid Calls for More Suspensions
Fantastic News: Nonfarm Payrolls Decline by 95,000, Much Weaker than Expected; Involuntary Part-Time Work Soars by 612,000!
SEC Failure to Regulate MBS Resulted in "Interconnected Ponzi Scheme with Various Types of Concurrent Fraud"

40 State Attorneys General to Investigate Mortgage Fraud; Bank of America Halts Evictions Nationwide; Senator Reid Calls for More Suspensions

Posted: 08 Oct 2010 03:50 PM PDT

Bloomberg reports Attorneys General in 40 States Said to Join on Foreclosures

Attorneys general in about 40 states may announce a joint investigation into foreclosures at the largest banks and mortgage firms, according to a person with direct knowledge of the matter.

State attorneys general led by Iowa's Tom Miller are in talks that may lead to the announcement of a coordinated probe as soon as Oct. 12, said the person, who declined to be identified because a final agreement hasn't been reached. The number of states may change because several are still deciding whether to join the investigation, the person said. New Mexico Attorney General Gary King said today in a statement that his state will join a multi-state effort.

"We are aware of or involved in a large number of investigations that lead us to believe there are in the neighborhood of 40 state attorneys general who have initiated investigations or expressed an interest," McManemin said in a telephone interview.

Officials in at least seven states have already announced investigations into claims that employees at home lenders and loan servicers signed court documents without ensuring the information was accurate. Yesterday, Miller said in a statement that he was working with state officials, banking regulators and the U.S. Justice Department to launch a coordinated review. Attorneys general in Ohio and Connecticut have said some of the practices may amount to fraud.

If by some chance you have missed this story, please see SEC Failure to Regulate MBS Resulted in "Interconnected Ponzi Scheme with Various Types of Concurrent Fraud" for a detailed recap.

Bank of America Halts Evictions Nationwide

Reuters reports BofA U.S.-wide foreclosure halt draws calls for more

U.S. lawmakers pushed for the country's largest mortgage lenders to suspend foreclosures in all 50 states after Bank of America Corp announced on Friday it would temporarily halt evictions nationwide.

BofA, the largest U.S. mortgage servicer, is the first U.S. bank to institute a nationwide freeze on foreclosures, expanding on a 23-state suspension announced last week while it conducts a review of its procedures.

The foreclosure furor is erupting just weeks before November 2 congressional elections where voters look set to take out their anger at high unemployment and a sluggish economy on Democrats who currently control both the House of Representatives and the Senate.

Senate Majority Leader Harry Reid, House Oversight Committee Chairman Edolphus Towns and California Attorney General Jerry Brown, who is running for governor, called on other lenders to follow Bank of America's lead.

Wells Fargo has said that it is "confident" in its foreclosure paperwork, and Citigroup is also resisting calls for a foreclosure moratorium.

As of Friday afternoon, other major mortgage servicers had not followed Bank of America.

At least one senior official at the Federal Reserve is concerned about the mortgage foreclosure process and its potential impact on the economy.

Proper Perspective

Before this is over I would expect nearly every state to join in these lawsuits. Legal costs will be massive.

However, it is very important to remember that except in extremely rare and highly publicized cases, there is essentially no dispute that who were foreclosed on have not been paying their mortgages and are in default.

In other words, in nearly every case, these people are going to lose their homes and indeed should lose their homes. The question is not whether these people should or will lose their homes, but rather who has the legal right to foreclose.

These delays will be very expensive which should be expected when there is this much fraud.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Fantastic News: Nonfarm Payrolls Decline by 95,000, Much Weaker than Expected; Involuntary Part-Time Work Soars by 612,000!

Posted: 08 Oct 2010 09:57 AM PDT

Today we have fantastic news from the BLS that the economy shed 95,000 jobs, far weaker than the economists' consensus expectation of a mere 5,000 drop.

Moreover, part-time workers for economic reasons increased by a whopping 612,000 workers, much higher than an recent numbers and also higher than a year ago. The effect of rising part-time work is the effective unemployment rate shot up .4% to 17.1%

Shedding jobs is great news because it seals the fate for Bernanke's Quantitative Easing program that is all but guaranteed to create jobs and drive the stock market higher according to the consensus opinion of Wall Street cheerleaders.

The worse the news, the better off the economy would be. Unfortunately, the official unemployment rate stayed flat at 9.6%. Had it blasted higher to 9.9% or better yet 10.1%, I am sure the stock market wold be up 3% right now.

To recap, the only way the economy can get better is if it gets worse first. So bad news is good news, and good news shows the bad news worked. Thus, all news is good news. Such is the magic of QE.

In case you missed the sarcasm, and think stocks are cheap and QE will blast the market higher until the economy improves, please consider the following missives:

Sure Thing?!

Hussman calls for 10-Year S&P 500 Total Return in the Low 5% Area; Thoughts on Risk Management

Lessons Not Learned - No Failure Too Great to Admit It

Bernanke says Lawmakers Should Consider Rules on Fiscal Limits; Expect Hissy Fit from Krugman; Bernanke Pisses in the Wind

Employers in U.S. Cut More Jobs Than Forecast

Bloomberg reports Employers in U.S. Cut More Jobs Than Forecast

The U.S. lost more jobs than forecast in September, reflecting a decline in government payrolls that shows the damage being done by rising budget deficits.

Employers fired 95,000 workers after a revised 57,000 decrease in August, Labor Department figures in Washington showed today. The median estimate of economists surveyed by Bloomberg News called for a 5,000 drop. The unemployment rate held at 9.6 percent.

Private payrolls that exclude government agencies climbed 64,000, less than forecast, underscoring the concern expressed by some Federal Reserve policy makers that the rebound from the worst recession since the 1930s has been too slow and may require easier monetary policy. Unemployment forecast to average at least 9 percent through 2011 may restrain consumer spending, the biggest part of the economy.

The Labor Department today also published its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 366,000 jobs in the 12 months ended March 2010. The data currently show a 1.7 million drop in employment during that time.

"If we're only creating jobs at this pace, the unemployment rate is going to go higher," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who forecast a 65,000 gain in private payrolls. "We aren't creating enough jobs to keep it steady."

The unemployment rate is forecast to average 9.2 percent next year, according to the median forecast in a Bloomberg Survey of economists last month.

What's Not To Like?

The above article is chock full of great news such as downward revisions for August on top of an additional 366,000 jobs in the 12 months ended March 2010 (especially when economists like Zandi said that revisions would surprise to the upside).

More seriously, the only thing keeping the unemployment rate "low" at 9.6% is a huge drop in the participation rate this year with people (at least according to the BLS) dropping out of the economy at a staggering rate.

BLS vs. Gallup

One more thing before diving into the actual BLS report. Here is something I wrote yesterday: Gallup Survey Shows Unemployment Jumps From 9.4% to 10.1%

As economists up their forecasts for tomorrow's jobs report, I am lowering mine.

First, the recent ADP report suggests private nonfarm employment dropped by 39,000 with expectations of a gain.

Second, Gallup Finds U.S. Unemployment at 10.1% in September
Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September -- up sharply from 9.3% in August and 8.9% in July. Much of this increase came during the second half of the month -- the unemployment rate was 9.4% in mid-September -- and therefore is unlikely to be picked up in the government's unemployment report on Friday.

The increase in the unemployment rate component of Gallup's underemployment measure is partially offset by fewer part-time workers, 8.7%, now wanting full-time work, down from 9.3% in August and 9.5% at the end of July. ....

Looking ahead, I expect economic and jobs conditions to worsen, and for new all time highs in the unemployment rate.

BLS September Report

Please consider the Bureau of Labor Statistics (BLS) September 2010 Employment Report.

Nonfarm payroll employment edged down (-95,000) in September, and the unemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job
losses in local government. Private-sector payroll employment continued to trend up modestly (+64,000).

Unemployment Rate - Seasonally Adjusted

Nonfarm Payroll Employment - Seasonally Adjusted

Since September 2009, temporary help services employment has risen by 362,000.

Establishment Data

click on chart for sharper image

Highlights

95,000 jobs were lost
21,000 construction jobs were lost
6,000 manufacturing jobs were lost
86,000 service providing jobs were added
5,700 retail trade jobs were added
14,000 professional and business services jobs were added
17,000 education and health services jobs were added
38,000 leisure and hospitality jobs were added
159,000 government jobs were lost. Of them, 77,000 were temporary census workers

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

Production and non-supervisory work hours were flat at 33.5 hours. Average hourly earnings rose $.01 at $19.10.

BLS Birth-Death Model Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals).

Birth Death Model Revisions 2009

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Birth Death Model Revisions 2010

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Birth/Death Model Revisions

The BLS Birth/Death Model methodology is so screwed up and there have been so many revisions and up it is pointless to further comment other than to repeat a few general statements.

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another.

The BLS knows full well their model is screwed up. Yet they stick with it, hoping that someday it will work again. The problem is the model assumes this is a normal recovery. It isn't, and it won't be.

Thus we have a third major revision to prior birth-death adjustments.

Here is a table from today's jobs report.

Household Data

The number of unemployed persons, at 14.8 million, was essentially unchanged in September, and the unemployment rate held at 9.6 percent.

The number of long-term unemployed (those jobless for 27 weeks and over), at 6.1 million, was little changed over the month but was down by 640,000 since a series high of 6.8 million in May. In September, 41.7 percent of unemployed persons had been jobless for 27 weeks or more.

In September, both the civilian labor force participation rate, at 64.7 percent, and the employment population ratio, at 58.5 percent, were unchanged.

Involuntary Part-Time Workers

The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose by 612,000 over the month to 9.5 million. Over the past 2 months, the number of such workers has increased by 943,000. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

[Mish Note: In January the number was 8.3 million]

Persons Not in the Labor Force
About 2.5 million persons were marginally attached to the labor force in September, up from 2.2 million a year earlier. These individuals were not in the labor
force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Table A-8 Part Time Status

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612,000 more people are working part-time for economic reasons than last month. This was a massive jump from June, July, and August, and even from one year ago today!

There are now 9,4720,00 workers whose hours may rise before those companies start hiring more workers.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

click on chart for sharper image

Grim Statistics

The official unemployment rate is 9.6%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 17.1%, up a whopping .4 from last month.

Looking ahead, there is no driver for jobs. Moreover, states are in forced cutback mode on account of shrinking revenues and unfunded pension obligations. Shrinking government jobs and benefits at the state and local level is a much needed adjustment. Those cutbacks will weigh on employment and consumer spending for quite some time.

Expect to see structurally high unemployment for years to come.

Keep in mind that huge cuts in public sector jobs and benefits at the city, county, and state level are on the way. These are badly needed adjustments. However, economists will not see it that way, nor will the politicians.

Recap

The private sector hiring increase of 64,0000 is very weak for a recovery. It is consistent with rising unemployment rate. Part-Time workers for economic reasons increased by a whopping 612,000 workers, much higher than an recent numbers and also higher than a year ago. The effect of rising part-time work is the effective unemployment rate shot up .4% to 17.1%

This was all such good news, the stock market is higher.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

SEC Failure to Regulate MBS Resulted in "Interconnected Ponzi Scheme with Various Types of Concurrent Fraud"

Posted: 08 Oct 2010 12:11 AM PDT

The problems associated with a clogged foreclosure system continue to mount. Foreclosures in 23 states have been halted by major banks after allegations surfaced of various illegal practices.

PBS has a video discussion of some of the issues in 'Robo-Signing' Paperwork Breakdown Leaves Many Houses in Foreclosure Limbo

Ohio Seeks $25,000 for Every Violation

WCPN News reports Ohio AG Sues GMAC Mortgage Over So-Called Robo-Signings

Just about two weeks ago, the country's fourth largest lender, GMAC announced it was suspending foreclosure and eviction actions in 23 states, including Ohio. The reason? A document processor for the company admitted he had approved 10,000 foreclosure documents a month without even reading them. In the days that followed, Bank of America and JP Morgan Chase also halted foreclosures in states that require judicial approval. They, too, were concerned about the integrity of their foreclosure actions.

On Wednesday, Ohio's Attorney General Richard Cordray filed a civil suit against GMAC, its parent company Ally Financial, and the processor who had admitted to signing all those documents.

Richard Cordray: We are talking about lenders and servicers treating foreclosure not as a legal proceeding that deserves the careful attention of the property owner, the servicer of the mortgage and the courts, but rather as a production line - making widgets - that accords foreclosures little deliberate accuracy that the law, or for that matter, basic courtesy and common sense mandates be given to such serious matters.

Cordray's office is asking the court for civil penalties of up to $25,000 for every violation of the state Consumer Sales Practices Act and restitution for borrowers. The AG's office also sent letters asking for meetings with four other major lenders to discuss their foreclosure practices: JP Morgan Chase, Bank of America, Wells Fargo and CitiMortgage. Ally Financial, GMAC's parent company, has not yet responded to requests for comment.

Congress Passes Bill To "Streamline Foreclosure Process"

Adding fat to the burning fire of consumer anger, Congress ramrodded a measure that would "streamline the recognition of notarizations across state lines", arguably validating much of the robo-signings.

Obama Avoids Political Suicide With Pocket Veto

The New York Times reports Obama Plans to Veto Foreclosure Bill

White House officials said Thursday that President Obama would not sign a little-noted measure that suddenly gained attention amid questions about some big lenders' slipshod bookkeeping on home foreclosures, Jackie Calmes of The New York Times reports from Washington.

The president's pocket veto — rejecting a bill by withholding his signature while Congress is away — effectively kills the measure since lawmakers, who are out of town until after the Nov. 2 midterm elections, are not in position to override his decision with a two-thirds vote of the House and Senate.

The bill would have mandated that notarizations of mortgages and other financial documents done in one state, including those done electronically, be recognized in other states. By the time the bill arrived at Mr. Obama's desk, however, it was caught in the controversy over major institutions' acknowledgment of problems in processing documents for tens of thousands of foreclosures. Those included suspected forgeries and notaries' failure to review the paperwork as required.

Congressional Chickens

It would have been political suicide for the President to have signed that bill and he knows it, thus the "pocket veto". But how in the hell did such a bill pass Congress in the first place?

The answer is the chickens in both houses of Congress passed the "Interstate Recognition of Notarizations Act" by voice vote.

In a blatant act of galling chicken behavior here is the result.

Apr 27, 2010: This bill passed in the House of Representatives by voice vote. A record of each representative's position was not kept.

Sep 27, 2010: This bill passed in the Senate by Unanimous Consent. A record of each senator's position was not kept.

Timely Blowup

If ever there was a timely blowup, this was it. Had the Senate acted earlier in the year, the president would have signed this monstrosity. In retrospect it is rather amazing it did not pass earlier.

Time To Abolish Voice Votes

For still more on the pocket veto, please see Obama To Veto 'Robo-Foreclosure' Bill

Right before it recessed last week, the Senate passed a bill — the Interstate Recognition of Notarizations Act of 2010 — that could have made it more difficult for foreclosure victims to challenge banks that may have improperly approved their foreclosure. The legislation would have forced states to accept documents that were notarized in other states, under potentially different sets of notary standards, without verifying any of the documentation. The Senate passed the bill without debate and despite widespread reports of foreclosures across the country being approved by bank "robo-signers" (employees who weren't verifying the necessary documentation to legally okay a foreclosure).

It is amazing, as well as amazingly telling that the Senate passed this bill AFTER the robo-signing scandal story broke wide open. Sadly, we do not know the idiots who voted for this measure.

This disgusting process certainly highlights ample reasons to abolish voice votes.

Who Should Pay?

The above articles and commentary discusses in detail what happened, but questions linger about who should pay, and how to determine the losses.

Economist economist Tom Lawler discusses the situation in "Foreclosure-Gate": Who Will, and Who Should "Pay"?

It seems pretty clear that one of the outcomes of the recent "revelations" is that many foreclosures will be postponed; there will be more "refilings" of foreclosure petitions that will cost money; more borrowers facing foreclosures will hire lawyers, and servicers will have to reimburse more borrowers for legal fees; and some foreclosures could be delayed for quite a while. It is unclear at this point whether there will be any significant number of completed foreclosures that might be reversed, but if so that's gonna cost! Net, there are going to be significant costs that someone is going to have to bear.

But who will bear those costs? Will it be mortgage servicers? Well, if they also own the mortgage, sure. But what about for loans they service for others (including private-label securities, Fannie, Freddie, FHA, VA, …)? Who's a' gonna' pay?

From a "who should" perspective, any increase in losses associated with mistakes made by mortgage servicers, especially if those mistakes involved not following state foreclosure laws, which is a "violation" of most servicing contracts, the answer is crystal clear – the mortgage servicers. But how easy is it going to be to determine losses associated with mistakes by mortgage servicers? What are the "rules" on what a servicer can "recoup" in terms of costs associated with foreclosure when a servicer makes a mistake in private-label deals? With loans serviced for Fannie and Freddie, or FHA? What about delays in foreclosures clearly associated with servicer mistakes, which generally result in increased loss severities? Mortgage investors shouldn't bear those costs, but how can they be sure they won't?

What if there is a national "foreclosure moratorium" triggered by mortgage servicer mistakes that ultimately increase the severity of losses? Who "pays the price" in reality, as opposed to who "should?"

More Likely Than Not, Taxpayers Will Pay

Lawler says he does not have the answers to those questions, and right now I don't either. However, the attempt by the Senate to ramrod through that legislation shows the senate's intent to minimize the damage to the guilty parties.

Voters are extremely angry right now, and the next Congress is likely to be far more conservative than this one, but after the election the slate will be clear for another two years.

I hope I am wrong about this, but I smell another taxpayer sponsored bailout, possibly via some backdoor concocted scheme involving Fannie Mae. This trick will be to pass a bailout that does not look like one.

If that can be done, rest assured it will be done.

Problems Deeper Than Paperwork

The Washington Post reports In foreclosure controversy, problems run deeper than flawed paperwork

Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans.

Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title.

These fundamental concerns over ownership extend beyond those that surfaced over the past two weeks amid reports of fraudulent loan documents and corporate "robo-signers."

At the core of the fights over the legal standing of banks in foreclosure cases is Mortgage Electronic Registration Systems, based in Reston.

The company, known as MERS, was created more than a decade ago by the mortgage industry, including mortgage giants Fannie Mae and Freddie Mac, GMAC, and the Mortgage Bankers Association.

MERS allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands, lawyers say.

"Assertions that somehow MERS creates a defect in the mortgage or deed of trust are not supported by the facts," a company spokeswoman said.

But that's precisely what lawyers are arguing with more frequency throughout the country. If such an argument gains traction in the wake of recent foreclosure moratoriums, the consequences for banks could be enormous.

Janet Tavakoli, founder and president of Tavakoli Structured Finance, a Chicago-based consulting firm, said that for much of the past decade, when banks were creating mortgage-backed securities as fast as possible, there was little time to check all the documents and make sure the paperwork was in order.

The result: "Banks are vulnerable to lawsuits from investors in the [securitization] trusts," Tavakoli said.

Referring to the federal government's $700 billion Troubled Assets Relief Program for banks, she added, "This problem could cost the banks significantly more money, which could mean TARP II."

Janet Tavakoli Blames the SEC as a "Failed Regulator"

The one thing we have not discussed about this mess is who to blame. I received an email from Janet Tavakoli on Thursday laying the blame smack on the SEC.

Janet Writes ...

The SEC is a failed regulator.

Checking documents to make sure the paperwork is in order is not an optional step when securities are created and underwritten, and underwriters should be held accountable.

Unfortunately, flawed paperwork is far from the only problem with the securitization process.

The preponderance of evidence indicates a massive, widespread, interconnected Ponzi scheme with various types of concurrent fraud.

So far our regulators, court system, and Congress have all failed in their duties.

Free Market Failure? Hardly!

Someone is sure to blame this mess on the "free market". Nothing could possibly be further from the truth. The Fed's loose monetary policies were the great enabler in this scheme. The mere existence of the Fed, Fannie Mae, Freddie Mac, and the FHA run counter to free market philosophies.

Note too, that the big three rating agencies (Moodys, Fitch, S&P) were sponsored by the SEC. Please see Time To Break Up The Credit Rating Cartel for details.

Regulators in Bed with Industries they are Supposed to Regulate

Finally, and as I have pointed out on many occasions, the one legitimate function of government is to protect civil rights and property rights, with everyone treated equally under the law. Regulation designed to prevent fraud, does just that.

However, and as is typically the case, regulators get into bed with those they are supposed to regulate.

How does this happen? Look no further than the appointment process itself. How many key players in the Bush and Obama administrations have ties to Goldman Sachs and JPMorgan? How many have other ties to Wall Street and other large banks?

Playing Field Purposely Dishonest

Cries for more regulators will not do a damn thing when people like Elizabeth Warren Tossed a Bone and Appointed Geithner's Lapdog

We do not have a level playing field for the simple reason Wall Street and the big banks do not want an honest playing field. Unfortunately, the corrupt way corporations buy politicians all but ensures the status quo, even as screams for more regulation reverberates from the mountain tops.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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