China just increased its capital ratios. This is the 10th hike this year.

http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/316297/1/.html

They're nervous and doing a controlled banking correction instead of waiting for an uncontrolled one.

Forget it, Jake - it's AmnesiaTown

Especially in public companies where management watches the stock price daily, it is essential to meet quarterly earnings growth targets, which these days are set at absurd levels from 15% - 25% p.a. So the mortgage business had to keep the fee income growing at high levels.

It is a lot easier in a bank to achieve your loan growth targets if you can cut out those nasty credit officers who police the credit risk you take on. The way to do this is to securitize your loans - sell them to investors as fast as you book them. Or, you can sell them to Fannie Mae and Freddie Mac, except these two agencies were banned by Congress from booking much new business the past few years. Either way, you can argue to the credit department that there is no credit risk - the loans leave the bank the minute they are done. You can then operate with minimal credit standards.

But suppose you run out of potential clients who meet even these standards? Abandon the standards altogether. Eliminate the need for proof of a job and income. Make it as easy as possible for people to get a mortgage, because it is the investors in the securities who are taking on any default risk, and you're paying them a handsome yield, aren't you?

Suppose further while all this is developing that the Fed starts raising interest rates, making it harder for even your new credit-impaired clients to qualify? Easy - lower the interest rate on the mortgage for the first year or two with teaser rates. Change the structure of the mortgage so that after two years the rates set at a much higher level to compensate for the first two years giveaway. That makes the investors whole, and if the customer has trouble paying the new rates they can always refinance into a new mortgage with a lower rate, using the equity they've built up in the two years of homeownership. Of course they will build up equity - real estate values only ever go up, as everyone knows.

Hence the trap was set. When the teaser rates hit, millions of new homeowners had no way of meeting the payments. Home values started to go down given all the homes going into foreclosure, so there was no out for the banks or the customers.

Before the market turned south, banks also were marketing second mortgages as home equity lines of credit - the piggy banks used by customers to "cash in" some of their profit in their home. For this, banks deserve whatever losses they carry here, because first they were willing to lend up to 100% or more of the home value, and stand second behind the first mortgagor. This is just stupid - it meant the banks were counting as well on continuing asset appreciation to get them out if the customer couldn't meet the mortgage payments.

The second stupid and misleading thing they did was sell customers on the idea that their house appreciation was profit they actually earned, and taking cash out of the home was just like cashing in your profit. Banks never emphasized that homeowners were cashing in equity and replacing it with debt. For that matter, debt was never mentioned - only the monthly interest payments, which with teaser rates looked very low.

Think back to all the mortgage advertisements you've seen in the past 10 years. They were always about the monthly payment and how you could reduce it. The total new amount of debt you were taking on was hidden until you signed the papers. This type of advertising is misleading if it isn't fraudulent, and was an example of the collapse of credit standards in the mortgage business.

That's worth repeating: the collapse of credit standards is what this crisis is all about. Somebody else was going to be on the hook, or the market appreciation was going to get the bank and customer out of any trouble. The problem was, at the slightest hint of default risk in the investment securities, investors panicked and stopped buying. The music stopped - no new securities could be issued and banks could only do loans that they kept, not securitized. Without this crutch, with no one able to buy new mortgages, the house appreciation stopped. Homes for sale exploded and house values started to go backwards, not up. A vicious cycle has set in to replace the virtuous cycle that allow credit to explode.

What the article suggests is that we are only in the early stages of this crisis. The second mortgages are now starting to collapse too, and these will be problematic because there is no equity left for even the bank with the first mortgage, forget about the bank holding a second mortgage. This is why Wells Fargo announced they were writing down so much in second mortgages.

Following this, the loans with teaser rates will implode.

Adding all these losses up suggest that some big banks will have to be rescued by the government and merged with other banks. The only question here is whether the public will panic and start a run on these banks, making the problem much worse. I wouldn't be surprise to see that happen. We just saw Florida municipalities panic when they discovered their pension investments were frozen. Bank runs are easy to predict here.

One last thing about your question. The economy was swimming in credit because the banks were creating so much of it. This was an effort not to put credit to work, but to make more of it so that the fee income could grow for the banks. Greed, stupidity, deception, fraud, and blindness to the reality of all is what motivated this disaster.

Thanks. Lots of stuff to think about.

there are al least 3 parties in a lonn

The borrower
the servicing company
the investor (who paid money for the loan)

How is it the servicing companies foreclose? They don't appear to own the loans.

Two Ohio courts just looked at this issue and decided that servicing companies could not foreclose if they didn't show up in court with a clear title. The title could be anywhere, given all the parties in securitization who have an ownership interest.

Countrywide has been very aggressive in foreclosing. Less than 2% of their defaulted loans have been given any amelioration. So their tactic of grabbing the property and forcing a quick sale might be stopped by the courts.

There are similar problems if not fraud going on in the foreclosure process. Banks and servicing companies are adding all sorts of fees, and miscalculating out of error, laziness, or greed, the real amount owed by the customer. This is all part of the pollution that occurred in the process when so many fees were introduced. When house values were going up, nobody cared about the fees, but now we see how egregious they truly were.

If the debtor can't even trust the lender to accurately and faithfully calculate what is owed, the entire banking relationship breaks down and debtors feel no compulsion to pay back anything.

How can the servicing companies ever have clear title? Surely the title belongs to the investors? Then there has to be some agreement, including power of attorney for the servicing companies to foreclose.

It's got to be a lot of paper, that must be produced on demand (the borrower's demand)...right?

The title does belong to the investors, several hundreds of them for the typical mortgage security. But not one of them is holding on to the actual piece of paper, and neither apparently is the servicing company or the mortgage broker or the real estate agent or the lawyers or any of the dozens of people who fed off the fees channeled through the process.

Why should anyone care who has the title or who has legal rights to it once the fees were paid, most of which were paid technically by the banks who issued the checks at closing and rolled it all up into what the customer owed.

Securitization spread the risk all right, just as it spread the responsibility and made it much harder to fix any problems.

_{1."George Washington did not cross the Delaware for Capitalism," -Shmuley Boteach.
2.The Dems haven't punished the GOP enough, so you're going to reward the Republicans?}

An interesting percentage of mortgages have screwed-up title transfers: the holder can have trouble proving title.

I don't know how to demand proof of title without damaging your credit, but I'm sure such a challenge is possible.

And now for the money shot: http://www.foreclosureradar.com/
Find out how much of your neighborhood is in trouble.

Forget it, Jake - it's AmnesiaTown

To borrow a phrase about rugged individuals out west living without electricity (or stealing it where they can), it is quite likely that millions of Americans will refuse to participate in the credit scheme that defines this country. They just won't care anymore about their credit rating, they'll walk away from their debts without negotiating any repayment, they'll stop using banks and participating in the electronic economy. "What have I got to lose," they'll reason. "I have no assets, no investments, not much of a job, and no prospects."

Certain hurdles will have to be overcome, like finding a way to access cash and checking accounts, stopping the harassment of bill collectors, and preventing garnishment of their wages. In a bad enough recession, though, people will band together to find answers to these problems.

Inner city people have been living off the banking grid for decades. They already have the model in place for people who have lost everything playing by the rules.

If this is what industry experts and insiders think, the problems aren't going to be fixed soon. There was a ton of fraud in the process, but the core of the problem was greed and the lack of any credit standards that resulted from greed taking hold. The fraudsters took advantage of it, but the industry created the environment in the first place.