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Washington goes into a mood of denial, refusing to see the impending danger from the continuing foreclosure crisis. The media has failed to focus on an important event – the sending of a memo by the Federal Reserve to Congress committees overseeing the financial segment carrying a message of warning. The action is extraordinary as the note came without any prompting.

The note stated that the housing market is challenged by excess supply, losses from inept foreclosures and absence of constructive policies that are causing property value to further tumble; it is dragging the broader economy preventing strong recovery.

The concerns of Bernanke have been echoed by three other three top officials of the Fed – presidents of Fed banks of Boston and New York and Federal Governor Betsy Drake.  The president of New York Fed, William Dudley said, “The ongoing weakness in housing has made it more difficult to achieve a vigorous economy recovery”.

There are many indications that the present policies pursued in the housing sector will at the least put brakes on an economic recovery and at the most lead to dangerous consequences that will impact not only on the financial segment but also on the well being of the middle class.

The zombie banks have performed poorly while the government has been trying to cover up these faults. This has inevitably led to the failure of the housing programmes initiated by Washington. The programmes relied on voluntary support of financial entities who know nothing but the lining of their own pockets.

The national economy depends 70% on consumer spending and this is the vital part for any recovery. To garner sufficient demand the middle class should have money in their purses plus there has to be spending by the top 1% sitting on wealth. The report of the Fed suggests that the housing crisis is unlikely to recover.

The report stated that over $7 million of equity on residences has vanished. This is over half of what the amount was during the early part of 2006.

It noted, “This substantial blow to household wealth has significantly weakened household spending and consumer confidence” The worst affected has been the middle-class because for them the house is the prime source of wealth. The lower income group is not likely to be homeowners while the upper income group has other types of wealth like businesses and financial assets.

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The Blacks have been worst hit by the foreclosure crisis. Many accusing fingers point at Community Reinvestment Act (CRA) that bans any form of redlining. The CRA stipulates that financial institutions find out and accordingly respond to the credit requirements of all in the regions within their jurisdiction, including those in the low to middle-income group. Accordingly they mandated to resort to sound lending practices that are safe.

According to Federal Reserve a mere 6% of highly toxic sub-prime loans made to those in the low to middle-income group originated from lenders that came under CRA. The bulk of these loans were contracted by financial institutions not covered by this law.

According to Center for Responsible Lending nearly 8% of the Blacks and Hispanics have seen their homes swallowed by foreclosure; in comparison 4.5% Whites have been affected. As per the estimates of United for a Fair Economy one third of Black families and 40% of the Hispanics are facing the danger from sliding down from the middle-class to the poor category because of the foreclosure triggered economic crisis.

Why was there this concentration of toxic loans and subsequent foreclosures in areas resided by the minorities? In Louisville at least the blame lies with the investors – primarily white speculators. They did not reside in these localities.

Research conducted by John Gilderbloom and Gregory Squires has found that in each of the years of 2007 and 2008 there were 2,000 foreclosure auctions. It measured to 39 foreclosures per census tract resided by Blacks and 20 resided by Whites.

In the Black area the count was 15 units owned by the investors experienced foreclosure while in the White area it was 2 units. Most of the foreclosed houses in Black localities were owned by Whites who resided far away from these places.

In Black areas the culprits were mostly the White investors seeking quick profits. Louisville is not the exception but rather the rule. It stands right in the middle of the chaos. It ranks 103 among 203 metro regions in recent foreclosure ratings.

There are many factors behind why a property is foreclosed upon and why the rates differ from one region to another; race is one of the reasons but not the only one.  The other variables that fuel foreclosure – crime, property values, family earnings, levels of income, vacancies and toxic loan numbers, are the same for all communities, White or Black. But where the investor factor was isolated race did play an important part.

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One section of the Justice Department that monitors bankruptcy cases in courts is known as U.S. Trustees Program. In its annual report of 2010 noted that the mortgage servicing problems were all pervasive and long standing. These were not just technical but result in causing “real harm to homeowners in bankruptcy”.

The Trustee Program has accused the banks of falsifying affidavits by stating that the house owners owe them fees for some services that they never provided; the amount that the borrowers owed to the banks was inflated.

Professor Daniel Richman dealing with criminal law, of Columbia University Law School was formerly a federal prosecutor. He said the pivotal issue was who would be the targets of criminal investigation by the prosecutors.

Richman explained that a good number of workers who under the orders from supervisors churned out large number of affidavits could be sitting ducks. But that would not be worth the effort. Perhaps criminal investigations are necessary but it would be difficult to bring them against particular individuals who actually did the string pulling.

In 2010 October the Congress put pressure on the Justice Department to go ahead with investigations about foreclosure fraud. Eric Holder, the Attorney General said that it would be best to leave the matter to states with Justice Department’s help.

The OCC hastily came to a settlement with fourteen mega servicers to bring about operational changes and suggest compensation for those house owners who had been harmed.

The settlement leaves the banks to select their own agencies to determine who has been harmed and by how much. The arrangement has come in for harsh criticism from legislators and housing advocates for obvious reasons; the reviewing agencies would get their payments from the banks.

Since the eruption of the robo-signing scandal the Justice Department’s civil section has been working with a wobbly coalition comprising of all the fifty states seeking a settlement with the five mega banks that are also the biggest loan servicers. The settlement is leading towards a $20 billion (or maybe more) payment as penalties – a fraction of which would go towards paying the wronged house owners.

Law enforcement by the federal government has been practically non-existent even in those regions that have been decimated by the foreclosure crisis like Las Vegas.

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The Federal law is there but enforcement? It does not exist, even in those area worst hit by the foreclosure crisis like Las Vegas. Last year in 2010 the FBI downed shutters on the office of its task force dealing with mortgage fraud. It had been focusing on petty swindlers.

Tim Gallagher of the financial crimes division of FBI (chief) said that the agents have been transferred to attend to other operations. Many states like Massachusetts, Delaware, California and New York have become frustrated and impatient with the absence of prosecution by federal agents. It has started to investigate the lapses of the banks on its own.

Last November Nevada was the first among the states to file criminal lawsuit against a financial entity. The attorney general indicted two executives of Lender Processing Services (606-count). They were charged with paying notaries of Nevada for forging their signatures and falsely notarizing these on default notices and documents that are mandatory as per Nevada State laws. The officials of the state informed that more indictments are expected.

John Kelleher, the chief deputy A.G. of Nevada said that the investigations were kicked off following complaints by citizens. He said they became concerned and then later shocked at the sheer volume of these forged documents filed with the recorder of the county.

Investigations dug up “tens of thousands’ of dubitable records that had been filed on the behalf of mega mortgage servicers. The two executives are contending that they are not guilty. LPS in a press release admitted to flaws in some of the documents but “these documents were properly authorized and their recording did not result in any wrongful foreclosure”.

Traditionally the office of the U.S. Attorney has filed the majority of cases against the big brass in the financial world. But it has failed to bring any criminal cases relating to foreclosures abuses involving any Wall Street giant.  Till now the only step that it has publicly taken was last October when it reached a settlement (civil) with the biggest law firm of the state – that of Steven J. Baum of Buffalo.

It had handled 40% of all the foreclosure cases in New York recently representing the bankers and servicers. The records of the court show that the judges were angry with the firm for submitting false statements and posting dubitable documents.

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Those who designed the foreclosure crisis is now helping to solve the problem of huge numbers of foreclosed houses Fannie and Freddie are sitting on. The top brass from some of the mega companies that brought about the foreclosures crisis are now submitting proposals to the FHFA about what can be done with the millions of residences that Fannie Mae and Freddie Mac are sitting on and how these could be turned into rentals.

Daniel Mudd of Fortress (CEO) decided to take leave, a strategic move, after facing a lawsuit on 16th December by SEC questioning his part while he was CEO of Fannie Mae from 2005 till 2008. Fannie and Freddie have been helped by the Treasury to tune of $170 billion after being taken over in 2008 by the federal government.

Mudd and the former CEO of Freddie Mac, Richard Syron have been charged by SEC of making understatements regarding the sub-prime loans that the firms had held amounting to billions. Mudd has replied that the investors as well as the government knew of “every piece of material data about loans held by Fannie Mae”. The lawyer of Syron, Tom Green said there “was no shortage of meaningful disclosures” on the part of Freddie Mac.

Fortress’ spokesperson Gordon Runte did not make any comments regarding the issue of submission of proposal by his firm. In a statement dated 16th December Fortress has said that the suit filed against Mudd is not related in any way to Fortress.

Greg Lippman of Deutsche Bank (trader) hosted a meeting, the first of its kind, of lawyers and investors who had crafted the contracts and the financial tools that were used while betting against the housing market. During the time of the crisis from 2007 till 2008 Lippman had assisted Deutsche Bank to counterbalance the losses it had incurred on mortgage related investments.

A spokesperson of Deutsche Bank, Renee Calabro did not make any comments. Lippman is now the chief-investment-officer with LibreMax Capital – hedge fund based in New York. It has not made any submissions to FHFA. FHFA cited five examples of the proposals that had been submitted. The details were not disclosed because of trade policies; the privacy of those who submitted the proposals also required to be honoured.

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The attorney general of Indianapolis, Greg Zoeller announced that more than 70 victims of foreclosures fraud will receive compensation of $60,000 from the Consumer Protection Assistance Fund. The fund has been newly created. The 32 consumers of Marion County will receive a sum of $20,442. It is expected to recover financial loss of around $73,961.

Zoeller said, “This important fund provides some relief for consumers who assist my office to bring legal actions against businesses that prey on consumers’ who are financially vulnerable as well as helping warn others to avoid these scams. Our office is appreciative of our state lawmakers’ efforts to create the CPAF to give victims who are facing difficult times the means to recover some or all of their losses.”

During foreclosure crisis, many homeowners became victims of frauds. Credit service agencies came up that promised loan modification. Consumers filed complaints with the office of Zoeller.

The Indiana General Assembly passed a legislation that created this fund. The CPAF was inspired by a fund that gave away $125,000 to victims of the American Escrow. This company based in Chicago had failed to cough up above $1 million that it collected from property owners.

Zoeller’s office filed cases against Litigation Law Group of Florida and Mortgage Home Start Services of California. According to the lawsuit, foreclosure companies had collected money from the people but failed to give refunds to them after they failed to provide services.

According to the lawsuit, both the organizations had violated the Credit Services Organization Act, the Deceptive Consumer Sales Act, Mortgage Rescue Protection Act, and Home Loan Practices Act.

Meanwhile, there is a bit of good news for the homeowners. Mortgage lenders like Freddie Mac and Fannie Mae have pledged that they would not foreclose on properties during Christmas. The moratorium will extend from December 19 to January 2, 2012.

Although legal proceedings will continue during the period yet there will be a complete stop on eviction. Also Wells Fargo and JP Morgan Chase said that they would not foreclose during the period. However, the eviction machinery will not be put off the track completely. Bank of America, too, issued a similar statement saying that it would not foreclose or displace homeowners during this period.

However, economists are of the opinion that unless the economy improves there will be no drop in foreclosures. If the economy is weak, frauds will be difficult to control.

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Steve Kroft in 60 Minutes points out although three years has elapsed since the onset of the foreclosure crisis that has brought down the American economy on its knees, not a single high ranking executive of Wall Street has been prosecuted. To find out why, the producer of 60 Minutes James Jacoby talked with Tom Borgers who helped in penning a book on this financial mayhem.

Previously Borgers was senior personnel with Financial Crisis Inquiry Commission of FCIC, in charge of investigating fraud. The commission was a panel set up with the nod from both political parties by the Obama government to find out the causes behind the crisis. At the end, FCIC submitted a report that ran into 500 pages.

One of the prime responsibilities of Borgers was to hone in on vetting, talk with whistle blowers; of these the two important ones were Eileen Foster and Richard Bowen.

The interview of Borgers by Steve Kroft was great – laced with important information, candid and direct.  James Jacoby said, “I think he felt a real duty to make sure that a lot of their findings were followed up upon. Most people who leave those commissions don’t really ever talk about it”. Thus this interview of Borgers was really unique.

Tom Borgers has had vast experience as investigator of fraud. He had been engaged by the federal government following the scandal of Savings & Loan. He prepared and directed criminal referrals and was instrumental in recovering claims to the tune of multi-million dollars. During that tenure Borgers saw bank executives by the hundreds prosecuted and imprisoned. It is in naked contrast to what is happening now during the current foreclosures triggered crisis.

Borgers told Kroft that FCIC had dug out fraud running into trillions of dollars. There has been gross negligence. In mortgage related fraud he found crimes had been committed by those who originated mortgages, the underwriters, and the banks – all “across the board”. Despite this till now there have been no prosecutions.

However the personal contribution of Borgers had been recognized. He was given by the Association of Certified Fraud Examines, the Examiner of the Year Award. His “selfless and tireless service to the United States people” was mentioned. He was also honoured by FCIC with Special Act of Service award.

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The continuing foreclosure crisis is causing even the wealthy to feel the pinch. It needs sack full of dollars to maintain and pay taxes for high ended houses like mansions, waiting endlessly for the elusive buyer. George Graham of Concierge Auctions (CEO0) said “Eventually, even people who have unlimited means will throw in the towel at some point”.

Some of the realtors are warning that when a famed mansion or a big estate cannot be sold at any auction because of lack of buyer then in future it becomes even more difficult to push through with the sale. Jeffrey Hyland of Hilton & Hyland based in Beverly Hills said, “If you have all that hype and then it doesn’t sell, then you’ve got egg on your face”.

Bob Hurwitz has been in the brokerage business for a long time in California (South). He recently tried but failed to auction off a house with a price tag of $45 million in La Jolla. He explained that after paying marketing fees it is a loss to the seller.

For the luxury estates the fees can go up to $150,000. He added that auctions turn off possible buyers as they are reluctant to pay an extra 8% to 12% as premium following the sale. It can add up to a million dollars or perhaps more for an expensive property. Laura Brady of Concierge Auctions commented that the majority of the buyers know about the fees that are involved – the system being the same as in traditional sales.

The luxury estates are frequently sold for much less than the price asked for previously. However in the beginning these prices are unrealistically high. The art auction houses of Sotheby’s and Christie’s are connected with the property firms but neither directly conducts auctions in this field in America. Both of them have affiliated agencies with auction departments that partner with firms like Premiere Estates and Concierge.

Neil Palmer of Christie’s International Real Estate (CEO) said that such types of auctions are quite usual in some regions of Asia as well as Australia. The firm does not think it is the best option for sellers in USA because here at the moment the discounts are too steep. But JP King’s Mr. King holds that it is the steep discounts that attract buyers but not always at an auction.

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Foreclosures are telling on the health of the nation according to a recent study. Economist Janet Currie of Princeton University has co-authored this study published by National Bureau of Economic Research. She said, “The foreclosure crisis is having a significant impact on mental health as well as on a wide range of preventable conditions that are susceptible to stress”.

The study covered four states of New Jersey, Arizona, California and Florida; these have been the worst hit by the crisis. Florida ranked second in the country while California ranked first. The ZIP codes of each state was analyzed. Comparison was made between visits to the emergency and hospital due to ailments related to stress during the period stretching from 2005 April till 2009 December.

For each clutch of one hundred foreclosed units in a neighbourhood the visits to the emergency rooms and admissions to hospitals increased by 7.2% for causes relating to hypertension and 8.1% for diabetes related trouble. The age of the group surveyed ranged from 20 years to 49 years.

Admissions and visits connected with anxiety went up by 12%. For ‘malaise’ (a broad term used for referring to stomach trouble and nausea) it shot up by 7.5% among the same age group. The numbers of attempts at suicide also went up.

Dr. Luis Allen of Florida Center for Behavioral Health (director) said, “The study confirms what we’re seeing in our clinic. We’re seeing more patients under financial stress whose mood, hypertension and diabetes are worsening. Often these patients feel so overwhelmed, they don’t do what they need to do to take care of their conditions”. Allen explained that when there is an increase in stress hormones then these conditions too worsen.

Allen added that because of the housing crisis families are being compelled to share accommodations and this overcrowding is leading to friction, arguments, increase in consumption of alcohol and abuse leading to anxiety, depression and even suicidal tendencies.

Mark Miller, a resident of Winter Park quipped that it is not necessary to have a scientist explain his condition. Fourteen months previously he had lost his job and nearly saw his house vanish.

To keep his house whose value had dropped by a third he exhausted his savings, retirement account and all else that he owned. He developed symptoms of stuttering, sweating, breathlessness while his eating and sleeping habits changed; he turned more to alcohol and drugs. However he was lucky to get help from counseling centre and the bank reduced his payment.

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In September both housing prices and sales figure dropped indicating that the market is continuing to ail. There is a suggestion from the Congress to bring about a change. Two senators, Mike Lee (Republican/ Utah) and Charles Schumer (Democrat/ New York) have sponsored a bill on 20th October that would give tourist visas to foreign purchasers of residences. They would have to pay cash and not buy the house through any mortgage loan.

The anticipation behind this move is that it would give an incentive to the rich living overseas to invest their money in the housing market in USA. The law would expedite visa formalities of the tourists. Longer stays would be permitted for the senior citizens of Canada. The overseas buyers would be allowed to stay a minimum of six months in USA.

The bill, if passed into law would be akin to an invitation sent out to exclusive people across the globe in the hope that it would ease the foreclosure crisis. Brian Phillips of Lee’s Communications (director) said, “If you are a person of means and you can live in the United States for more than six months (out) of the year, you can write a cash cheque to a homeowner …  in excess of $500,000, then we certainly welcome that”.

The bill stipulates that the purchaser has to spend a minimum of $250,000 on one residence where he or she is expected to stay. The balance amount from $500,000 could be spent to buy other properties that could be rented out.

Phillips explained that there are some who cannot sell off their residences and there are some here in USA who fail to purchase paying that amount. Thus the attempt is to link those who looking for buyers with the right kind of amount with those ready to buy.

In brief – this invitation is only for those who have the required cash ready in their pockets; it is assumed that with that kind of money they will buy not only the house but the accessories that go with it like carpets, furniture etc. The purchasers would be given tourist visas but not work visas. There is no chance of foreclosure as they would buy the units outright without going through the loan process.

There is broad support for the bill. It has been endorsed by Warren Buffet, the billionaire. In an interview conducted by Charlie Rose, Buffett said that this was a good way of clearing the glut the in the housing market.

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