New Foreclosure Crisis Has Much Broader Implications

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


According to international economist Hernando De Soto, one of the key differences between an undeveloped economy and a developed one is clarity of ownership of real estate. The recently emerging foreclosure crisis in the United States indicates a movement toward the the third world model.

There is still a large overhang of U.S. properties with severe mortgage delinquencies and this problem is likely to continue for several more years. As early as three years ago however, problems with implementing the foreclosure process became evident. During the housing bubble, banks became sloppy and didn't properly transfer ownership papers when loans were securitized into bonds. The current owners of those bonds frequently can't produce the appropriate documents in foreclosures cases in the 23 states that require court action for a foreclosure. This led to the 'show me the note' movement after a federal judge ruled in 2007 that Deutsche Bank lacked standing in 14 foreclosure cases because it could not produce the relevant documents. A number of similar judicial rulings followed.

The banks have gotten around this problem by producing notarized affidavits from 'expert' witnesses who claim they have thoroughly reviewed a packet of documents related to an individual foreclosure and that they are valid and complete. One such 'expert' was Jeffrey Stephan, who has admitted under oath to having signed off on the documents for 10,000 foreclosure cases per month for the last five years. Mr. Stephan not only did this for GMAC (its parent Ally Financial is 56% owned by the U.S. government), but also for J.P. Morgan Chase and numerous other banks. This process is now being called robo-signing. It should be referred to as robo-perjury. While I am not a lawyer, it would seem to me that a number of other possible crimes might also be involved here as well, such as racketeering and criminal conspiracy Whatever criminal activity took place, a majority government owned enterprise participated in it. 

Readers should ask themselves if there is any reason to think that the big banks are acting any differently in their other consumer credit cases, such as defaults on credit cards.

The revelations from GMAC loan officer Stephan have caused a foreclosure moratorium to be put into effect by a number of lenders. The lenders were apparently shocked to find out that one person couldn't actually read and thoroughly review 10,000 legally dense document packets per month. Apparently none of the 'brilliant' members of the U.S. judiciary caught on either. Yes, it would certainly have taken a legal genius of Clarence Darrow's caliber to figure out that something that was impossible just couldn't happen. GMAC was the first to stop foreclosures in the 23 judicial states (those that require court cases for foreclosure). J.P. Morgan Chase followed. On October 8th, Bank of America suspended foreclosure activity in all 50 states.

Interestingly, the current administration is opposed to a foreclosure freeze. According to the Center for Responsive Politics, employees of J.P. Morgan Chase, Citigroup and Goldman Sachs were three of the largest sources of funds for Obama's 2008 presidential bid. Only a cynic would think that this would have something to do with his administration's pro-bank view in the foreclosure crisis. Some might even claim that it looks like everything is being done to further the interests of a economic and political elite, just as happens in a corrupt third world country. If this were true, the banks won't be punished for flagrantly disregarding the rule of law, since it is only the little people that need to worry about such niceties.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

UK Q2 GDP: Unblanced, Unsustainable, and Unbelievable

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The UK economy grew by 1.1% in the second quarter according to just released figures from the Office for National Statistics. The pound rallied sharply on the news, but a look inside the numbers indicates this growth is neither balanced, sustainable, nor even believable.

Even a cursory glance at the Office for National Statistics charts shows quite clearly three components of GDP had an outsized impact in creating the good headline number - Construction Spending, Business Services and Finance, and Government and Other Services.  Without these three sectors, there was no growth in the UK economy. While these sectors were growing, there were significant decreases in the Electricity, Gas, and Water and Transport, Storage, and Communication categories. It would be reasonable to assume that these categories should be showing increases in a growing economy, but they aren't. The charts can be found at: http://www.statistics.gov.uk/pdfdir/gdp0710.pdf

The UK had a bigger housing bubble than did the U.S. and they have yet to work off the excesses of too much building earlier in the decade. Nevertheless, the biggest contributor to second quarter GDP was Construction Spending, up a whopping 6.6%. Based on the numbers, a major new building boom is taking place there. People capable of logical thought may wonder how this is possible. A reasonable explanation is an obvious statistical error since the UK changed the source for its construction numbers and for the first time is basing them on a new Monthly Business Survey for Construction. Expect some major downward revisions for this figure in the future because it is something that is just not possible in the real world (government statisticians rarely question an impossible number as long as it makes the government look good).

The next best category was the one that contained financial services. The UK has propped up its big banking institutions (and has nationalized more of them than the U.S. has) with a number of government programs. Not surprisingly, after this huge transfer of money from government coffers, they are doing much better as are U.S. banks There was a 1.3% increase in the Business Services and Finance category and this contributed almost as much to the total rise in GDP as did Construction Spending. Together these are both part of the FIRE (Finance, Insurance, Real Estate) economy, where excesses led to the Credit Crisis. The UK seems to be trying to reestablish the imbalances that led to 2008 economic collapse.

Finally, government spending was up 0.9%, almost the same as the increase in total GDP. Government spending in the UK is indeed the lynchpin for making GDP look good as is the case in the U.S. The new Conservative government is planning major spending cuts and tax increases though and this will negatively impact future GDP numbers. Going forward things are not going to look rosy for the UK economy. Perhaps this is why the Bank of England was recently discussing lowering interest rates. Either they have access to other private economic data or they simply realize how misleading the current UK GDP numbers are.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.