Nov132015
GSEs prepare to can-kick bad loans again as loan modifications reset
Previous loan modifications and old HELOCs face reseting to higher rates and recasting to full amortization likely leading to further loan modification.
Lenders don’t want to modify loans. They would far rather have the borrower pay in accordance with the promissory note they both signed when the loan was originated. Ordinarily, if a borrower is unable or unwilling to pay in accordance with the original terms, the lender would simply foreclose, get their loan money back, and loan that money to someone who will pay in accordance with the promissory note. Unfortunately, with so many borrowers underwater, lenders can’t foreclose and get their money back, so instead they modify loans to buy time until the resale value is higher than the outstanding loan balance.
The only way lenders can avoid recognizing losses is to avoid foreclosure and deny short sales until prices rise back to bubble-era heights were sellers can get out without taking a loss. To this end, lenders engineered a dramatic shortage of for-sale product on the MLS by stopping foreclosure proceedings and encouraging underwater loanowners not to sell, often by denying their requests by insisting on full repayment. Although lenders must accept a lower return on their investment capital while they wait for higher prices, they ensure the return of their capital at some future date; further, the restricted inventory helps hasten the reflation of the housing bubble and pushes up the date when they might get their money back.
I’ve long maintained that loan modifications are merely delayed foreclosures, but that may not be entirely accurate: Loan modifications are delayed distressed sales. When the resale value of a property exceeds the outstanding balance on the loan, lenders no longer need to accommodate borrowers requests for loan modifications. Millions of old loan modifications are due to reset to higher interest rates and thereby higher payments over the next several years. Those that are still underwater will likely be given another loan modification, but those who have equity will likely be denied. If you are considering to get a good loan, check here this new hard money lender California service.
Freddie Mac is Preparing Homeowners for HAMP Resets
BY: JANN SWANSON, Nov 9 2015, 2:27PM
Freddie Mac is counting on an approach to delinquent borrowers it developed during the foreclosure crisis to forestall any new problems some of those same borrowers may encounter with their maturing loan modifications. The company is trying to be preemptive with the thousands of homeowners who had mortgages modified through the HAMP program and will soon be faced with interest rate resets. …
In other words, they know this is a huge problem, and they will have to can-kick many of these loans over and over again.
Freddie Mac then sought to inform the public about the benefits of delinquency counseling, and to motivate those homeowners who wouldn’t call their servicer to talk to one of the counseling agencies. Those agencies were also given contact lists of delinquent homeowners who had stopped talking with their servicers. The agencies then experimented with different methods to engage the homeowners, win their confidence, counsel them, and put them back in touch with their servicer who could try and help the homeowner reinstate the loan or assist them with a workout option.
They tried everything they could to get a few more payments out of hopeless borrowers. In June of 2015 I reported that 362,000 American delinquent mortgage squatters refuse loan modifications. Why pay something when they could pay nothing and live in the house for free?
Since nearly all the outstanding delinquent loans are properties worth less than the outstanding loan balance, banks are unwilling to foreclose and record the losses, so they will cut any deal possible to get some repayment until the value of the house rises high enough the bank can make a full recovery in foreclosure. Since banks are willing to give any delinquent borrower a loan modification, any borrowers who are still delinquent are delinquent by choice — they would rather squat than pay anything.
Cookson said the agencies provided a holistic counseling approach that went beyond income and expenses and also included lifestyle changes that could help homeowners succeed over the long term.
Successful loan modifications require increasing borrower entitlements. If people are not forced to cut back discretionary spending before they obtain a loan modification, bankers are subsidizing the borrower’s discretionary spending. The standards of what constitutes discretionary spending from essential spending depends greatly on the the spender’s sense of entitlement.
Personally, I really like to play golf. I don’t spend the $150 per week I would like to on golf because it isn’t an entitlement, and I can’t afford to treat it as one. However, if I were a loanowner, and if my sense of entitlement made it right, I could consider my weekly round of golf an essential. Since this entitlement creates a hardship for me, I can petition my lender for a break on my loan payments.
Given that the United States fosters a culture of entitlement, educating borrowers to behave otherwise is an uphill battle.
Developing a financial budget that reduced overall debt and increased savings allowed many homeowners to return their mortgage to good standing and prepare for any future financial road bumps.
Austerity? That’s not the American way.
The program, she said, had exceeded expectations every step of the way. Over a half-million homeowners have participated in the program over the last ten years and an estimated 350,000 homes have been saved from foreclosure.
This is a great success from a banker’s perspective. They delayed 350,000 distressed sales until prices were high enough to get their money back.
It has also proven to be very cost-effective. Every dollar the company has spent has returned $10 or more in benefits to it and to taxpayers.
LOL! Yeah, right!
Now Freddie Mac is hoping the program will work again.
Hope is always a good plan, isn’t it?
The same counseling agencies are being given lists of HAMP and other borrowers with loan modifications to contact and use their expertise to engage and prepare homeowners for the rate change. They are also providing counseling for homeowners with more recent loan modifications to ensure they understand their new loan terms and are prepared to succeed with the new payments.
And if they are not prepared to succeed with their new payments, one of two things is going to happen.
- If they are underwater, they will be given a new loan modifications.
- If they have any equity at all, they will not be given a new loan modification, and they must either sink or swim.
Loan modification programs are a consistent failure. Redefault rates are very high, and very few borrowers will ever hang on long enough to sell at a time of their own choosing, particularly in the most beaten down markets. Lenders keep trying because they must kick the can. Politicians support them because it gets loanowners off their backs. Loanowners go along because the modifications help them supplement their profligate spending and support their entitlements.
Great system, wouldn’t you say?
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Two faces of O.C. housing: Nation’s 3rd highest prices as appreciation slows
Orange County is still the third most expensive market in the nation for the traditional single-family detached home.
Thursday’s report from the National Association of Realtors shows the median selling price in Orange County for the third-quarter was $715,300. Only two Bay area markets, Silicon Valley ($965,000) and San Francisco ($809,400), were pricier – as it’s been with this ranking since 2013.
But this same report shows Orange County’s housing market may be coming back down to Earth. Local home prices increased by 2.6 percent in the year ending in the third quarter – slower than a 5.6 percent gain for all of 2014 and a 20 percent surge in 2013.
Orange County’s gain was part of a nationwide run-up that saw appreciation in 87 percent of the 178 markets tracked. But the nationwide year-over-year gain was 5.5 percent – the fifth consecutive quarter that U.S. prices advanced more than Orange County on a percentage basis. The last time this happened was in 2008 as last decade’s housing bubble was bursting.
Orange County’s broad economy is outpacing the national business climate. For example, local jobs have grown at a 2.7 percent annual pace the past three years vs. 1.9 percent nationwide. So the slim local housing appreciation can’t be pinned on regional economic weakness. Rather, it’s a good bet that high unaffordability of local real estate is catching up to Orange County’s housing market.
The Bay Area and OC are prime examples of how well the top ~10% of earning households are doing.
Hasn’t that always been the case? When haven’t the top 10% earning households done well?
“Disproportionately” well.
I just wonder if that hasn’t always been the case, notwithstanding the current media narrative.
Clinton pushed programs to favor the poor over the middle or upper-middle class. The poor did disproportionately well under Clinton. Under Bush II the opposite was true. The very wealthy did disproportionately well under Bush II.
Can you provide some specific examples of what Clinton did for the poor?
Here’s what I remember:
Increasing the tax on social security hit the elderly hard.
Welfare reform made it harder for poor people to get government help.
For the rich:
He lowered capital gains from 28% to 20%.
He exempted the first $500k for primary residences.
He repealed Glass Steagall.
Correct on what Clinton did.
1. Presidents get too much blame and credit for what occurs during their terms
2. Clinton’s terms were during the .com (+ stock market) bubble. That is the source of any “prosperity” over anything else (mostly cap-gains in .com and financial markets). Any “prosperity” was like a “good party”. The hangover is still in effect today.
3. Bush II took office with a recession caused during Clinton’s term
(conveniently forgotten by most).
4. Clinton benefited greatly by being so weak in his first term (I believe he was even less qualified than Obama). The Republicans in congress forced the issue and we got “divided government”, which was the source of anything Clinton benefited from. Remember, they wanted to take over medical care in the country in 1992 and were laughed out of the room. Repealed Glass-Steagall, etc. Clinton was just another politician hack. The working poor lost ground under Clinton, just as they did under BushII- check the stats.
Timing is everything. Clinton’s presidency was a short term “party” with a long term hangover.
Today’s democratic party is different than Bill Clinton.
Also, I think it’s fair to say that much of today’s republican party (not in D.C.) is different than George W. Bush.
People had better get off of their asses and wise up … there’s more takers than ever going to the voting both. The silent majority and a-political types had better wake up, because they want to change America.
Example of a TAKER: https://youtu.be/Zmji36q8E4o
Silicon Valley ‘shack’ in Palo Alto lists for nearly $2 million
The 1930s-era house, technically a live-over-space above a two-car garage, is being listed by realtor Alex Wang of the Sereno Group. And the one-bedroom, one-bath home at 829 La Para Avenue can’t even be called a home, because it doesn’t even have a sewer hookup, so it can’t be certified for occupation. The house is a mere 180 square feet, smaller than most hotel rooms.
http://ei.marketwatch.com//Multimedia/2015/11/11/Photos/ZH/MW-DZ120_palo_a_20151111130821_ZH.jpg?uuid=313843f8-889f-11e5-935d-0015c588e0f6
For somebody willing to forgo a sewer hookup, I would save my $2 million and follow this guy’s plan instead:
A 23-year-old Google employee lives in a truck in the company’s parking lot and saves 90% of his income
http://www.businessinsider.com/google-employee-lives-in-truck-in-parking-lot-2015-10
That’s a hero in my eyes.
That is awesome. Good for this dude. And why not? Google has nothing to lose in his set-up — he’s more likely to stay in the office from 6am-10pm and work more anyway.
I knew a guy in college who went to my architecture school that did something similar. We spent most nights in the college’s studio anyway, catching a few Z’s on a couch. He parked his pickup camper truck in the parking lot, and slept in the camper every other night just to keep campus security off his butt. And he showered at the campus gym when he needed it. I think he did it out of mere survival mode in order to get a college degree and better his life, but it was a tough thing to do. I let him come stay a couple nights in my dorm room to shower and sleep because I felt a little sorry for him roughing it like that.
Where does he go if he needs to use the bathroom in the middle of the night?
My guess is the google campus is open 24/7 and so he merely goes into the building and uses the bathroom.
U.S. Foreclosure Starts Increase 12 Percent in October
default notices, scheduled auctions and bank repossessions — were reported on 115,134 U.S. properties in October, an increase of 6 percent from the previous month.
The 6 percent monthly increase in overall foreclosure activity was caused primarily by a 12 percent monthly jump in foreclosure starts, with 48,605 properties starting the foreclosure process for the first time in October. The October monthly increase was the largest month-over-month increase since August 2011, when there was a 24 percent month-over-month increase.
“We’ve seen a seasonal increase in foreclosure starts in October for the past five consecutive years, so it’s not too surprising to see the monthly increase this October,” said Daren Blomquist, vice president at RealtyTrac. “However, the 12 percent increase this October is more than double the average 5 percent monthly increase in the past five Octobers, and the even more dramatic monthly increases in some states is certainly a concern. The upward trend in foreclosure starts in those states in some cases could be an indication of fissures in economic fundamentals driving more distress and in other cases is more likely an indication of long-term delinquencies finally entering the foreclosure pipeline.”
October foreclosure starts increased from the previous month in 34 states, including California (up 21 percent), Florida (up 13 percent), New Jersey (up 15 percent), Illinois (up 20 percent), Maryland (up 300 percent), Washington (up 34 percent), and Michigan (up 37 percent).
Number of First-Time Home Buyers Falls to Lowest Levels in Three Decades
The share of U.S. homes sold to first-time buyers this year declined to its lowest level in almost three decades, raising concerns that young people are being left out of an otherwise strong housing-market recovery.
First-time buyers fell to 32% of all purchasers in 2015 from 33% last year, the third straight annual decline and the lowest percentage since 1987, according to a report released Thursday by the National Association of Realtors, a trade group.
The historical average is 40%, according to the group, which has been recording such data since 1981.
If home prices continue to rise sharply it will become even more difficult for new buyers to enter the market. The median price of previously built homes sold in September was $221,900, up 6.1% from a year earlier, according to the NAR. The median price for a newly built home rose to $296,900 in September from $261,500 a year ago, according to the Commerce Department.
“The short answer is they can’t afford it,” said Nela Richardson, chief economist at Redfin, a real-estate brokerage.
Mixed Economic, Housing Data Cast Doubt on Fed Liftoff
Most analysts and economists are predicting a rate liftoff by the Federal Reserve in December after nine years of at or near zero short term interest rates.
Recent mixed macroeconomic data, which includes many housing metrics, may delay that liftoff until 2016, however, according to National Association of Home Builders (NAHB) Chief Economist David Crowe.
GDP growth, while expected to ease in the third quarter from Q2’s solid rate of 3.9 percent, slowed down much more than expected to a weak 1.5 percent in the “advance” estimate for Q3. The Bureau of Labor Statistics’ stellar October employment summary, which reported 271,000 jobs added during the month, is believed by many to be sufficient economic improvement for the Fed to finally raise rates. That October employment summary many not be so rosy after digging a little deeper into the data, Crowe said.
“[T]he bounce back came after soft job readings for September and August,” Crowe said. “Those looking for good news on the labor front can point to a 5 percent unemployment rate. On the other hand, unfilled jobs have been trending up and the labor force participation rate was 62.4 percent in October, down 50 basis points from the 2014 average.”
“As most newly built home sales are due to move-up buyers, this is a trend worth watching,” Crowe said. “Nonetheless, new home mortgage interest rates remain low and consumer confidence data show rising numbers of households planning to buy a home in the near future.”
What Republicans Get Wrong About the Gold Standard
No country in the world today operates on the gold standard. That might change if some Republican presidential candidates have their way.
Texas Sen. Ted Cruz reiterated his support for returning to the gold standard in this week’s presidential debate. Kentucky Sen. Rand Paul has said the idea should be studied. Neurosurgeon Ben Carson alluded to the idea, saying, “We’ll have to tie our currency to something,” while former Arkansas Gov. Mike Huckabee advised, “Tie the dollar to something fixed and if it’s not going to be gold, make it the commodity basket.”
To say the least, this puts them outside the economic mainstream. In a University of Chicago survey of top academic economists of all ideological persuasions, not one advocated returning to the gold standard. “Love of the gold standard implies macroeconomic illiteracy,” declared respondent Anil Kashyap, also of the University of Chicago.
What explains the gold standard’s continuing appeal? In a nutshell, its proponents exaggerate its benefits and underappreciate its failures.
Under the classical gold standard, a country’s currency was convertible on demand to its face value in gold. If two countries were on the gold standard, their exchange rates were also fixed. In the early U.S., banks issued their own notes that were convertible to gold or silver (together called “specie”) on demand. When those notes were replaced by national bank notes in the late 1800s, and then Federal Reserve bank notes after 1913, those bank notes could in theory be converted on demand to specie, though in practice they seldom were.
Gold’s appeal is its rigidity: By fixing the supply of money to the supply of gold, it made sustained inflation impossible and prevented governments from financing wars and deficits by printing money.
In practice, though, gold’s stability was illusory. In boom times, banks anxious to finance more loans would issue far more notes and deposits than they had gold to redeem. Credit, economic activity and prices rose. When those loans went bad and people demanded their money back, banks failed, the money supply contracted, and the economy fell into a recession. The U.S. experienced multiple crises and recessions while on the gold standard.
The gold standard also left a country’s financial system at the mercy of events beyond its control. Because the money supply was linked to the quantity of gold in circulation, big discoveries of gold in California and Australia in the mid-1800s led to a global boom as prices climbed and economic output along with them, says Michael Bordo, an economic historian at Rutgers University. But eventually, the discoveries petered out, and a bust and deflation followed. (In 1993 Mr. Bordo published a study of how several countries performed under different monetary regimes.)
Governments routinely suspended gold convertibility to finance wartime deficits. But if those deficits resulted in inflation, returning to the prewar price level required deflation, austerity and usually recession, as happened to both the U.S. and more severely Britain after the First World War.
Although central banks like the Fed could temporarily create money to lend to banks experiencing a loss of deposits, they still had to maintain a certain gold “cover” ratio: The Fed had to have gold equal to 40% of currency and 25% of commercial bank reserves. A country running a trade deficit would lose gold to one with a surplus, forcing its central bank to raise interest rates to draw gold back—often producing deflation and recession.
While differing on the precise mechanisms, historians agree the gold standard was central to the Depression. In 1929, a recession in the United States caused prices, output and imports to plunge and the trade surplus to surge. This drew in gold from its trading partners, forcing them to raise interest rates. When European central banks tried to ease monetary policy, speculators guessed they would devalue, and pulled their gold out, causing the money supply to contract.
One by one, countries abandoned gold, and with their central banks now free to ease monetary policy, recovered. For the U.S., that came in 1933 and 1934 when Franklin D. Roosevelt devalued the dollar against gold and suspended its convertibility.
The Great Depression has persuaded economists that the gold standard—that “barbarous relic” as British economist John Maynard Keynes called it—robbed national governments of macroeconomic flexibility and made booms and busts more severe. Peter Rousseau, an economic historian at Vanderbilt University, says that independent central banks can control the money supply with paper money far better than they could with gold. The euro is a modern-day version of the gold standard insofar as peripheral economies are unable to boost growth by devaluing or easing monetary policy.
Gold Bugs act as if “money” were the 11th Commandment, rather than a government creation to facilitate commerce.
Gold bugs also dismissively refer to paper money as “fiat currency,” when gold is a much more difficult medium of exchange today. Try going to the grocery store with gold coins and see how far that gets you.
While it’s true that the use of paper money is mandated by the state (thus the fiat), once the declaration is made, it only becomes useful as currency because everyone agrees to accept it as a medium of exchange. Commodity money such as gold derives its usefulness as currency from the same collective agreement among all the parties.
Gold and paper money function exactly the same way if they are accepted by the masses. If people decide not to accept paper money, the government will intervene and force them to accept the currency “for all debts public and private,” but if someone attempts to tender payment in gold, the recipient has no such legal obligation to accept that form of payment. In the era of paper money, gold is far less useful as a medium of exchange.
To be a true gold bug, you also need to be a doomsday prepper. The only way paper money becomes worthless is if we have a doomsday cataclysm, all government breaks down, and we revert to anarchy. But even then, gold will not be the most valuable commodity or medium of exchange. Bullets will be more valuable than gold because if you have enough bullets, you can take someone else’s gold. Liquor will be more valuable than gold, but not as easy to transport as bullets.
Gold will absolutely crater as we continue to approach the deflationary flush …
Look at crude oil … collapse. Commodities … collapse.
When this ponzi economy resets, the FED will be somewhere between 0 and .50 basis points, and have 4.5 trillion on the balance sheet. They will not be able to do anything beyond bailing out more financial institutions and printing more QE.
The FED has failed to create inflation in wages, and now millions of families are becoming angrier everyday.
The statuesque is about to get crushed.
Financial knowledge impacts housing
The housing market has much to gain from homebuyers knowledgeable about saving, investing and borrowing and able to make sound financial decisions. Specifically, more financial knowledge leads to more stable markets.
Currently, a new generation of first-time homebuyers are on the cusp of entering homeownership: members of Generation Y (Gen Y). Gen Y had the misfortune of coming of age during the financial crisis and extended recovery. These individuals entered the workforce earning less income and carrying more debt than their predecessors. Thus, they’ve had difficulty saving up for a down payment.
In fact, just one-third of Gen Y is currently saving for a home purchase, according to a report by Zillow. However, the same report highlights the optimistic view held by this demographic: 87% say they will become homeowners (they’re just lacking a savings plan).
Now, imagine if lenders suddenly started offering zero down payment options, offering to cover transaction costs and throwing in a free iPad to boot. The number of responsible homebuyers (the one-third who are saving) would be quickly joined by those who want to buy a home, but lack the financial ability.
However, these zero down mortgages take the form of treacherous adjustable rate mortgages (ARMs), destined to reset in five years. Don’t worry, the lender says, you can refinance later. But in the meantime, rates will increase (as they undoubtedly will), making mortgages more expensive to obtain (and sustain in the context of an ARM). Further, with no savings put away for hard financial times, if the homebuyer is unable to get out of the mortgage before it resets, they will lack the ability to pay the much higher payments.
Defaults, foreclosure and spiraling home values follow. Sound familiar?
Much of the 2008 housing bust can be pinned on a lack of financial awareness from homebuyers. Lenders made extravagant mortgage as easy as signing on the dotted line (provided only that you had breath and a pulse). Homebuyers were all too ready to take part — but would as many homebuyers have jumped into the market if they had possessed more financial education?
Maybe not. The CFPB suggests each year of a student’s academic career covers:
* earning, income and careers;
* savings and investing;
* spending;
* borrowing and credit;
* managing potential financial risk and insurance; and
* money management and making financial decisions.
Imagine the havoc avoided if the irresponsible buyers of the mid-2000s had been armed with such pragmatic knowledge.
Flash-forward to today. To protect the next generation of first-time homebuyers from their own lack of financial knowledge (and generally undesirable financial situations), financial education is crucial. Real estate agents are the foot soldiers in this fight again financial illiteracy, helping ensure a more stable housing market in the coming years. This is good not just for the individual buyer, but for broader society as a whole.
GULP! If we’re relying on realtors to educate the public on finances, we are in serious trouble. Fortunately, we’re not. The ATR rules force creditors to offer borrowers reasonable financing for houses. Sure you can offer a 100% LTV mortgage, but the borrower will need the income capacity to reasonably afford that larger payment.
Prior to the housing bust, I would have been in the camp that said educate the masses and let them do as they will. After watching the behavior of well-educated people during the bubble and bust, I became convinced we need regulations to help protect people from themselves. Perhaps everyone should be educated on the perils the lie behind the barriers erected by legislation to appreciate the need for the rules? I don’t know. Knowledge and education didn’t prevent Congress from repealing Glass-Steagall, and removing that barrier helped facilitate the 2008 implosion. I’m thrilled by the protections Dodd-Frank put in place. Hopefully, the endless lobbying efforts of the financial elites won’t screw it up.
“Gold’s appeal is its rigidity: By fixing the supply of money to the supply of gold, it made sustained inflation impossible and prevented governments from financing wars and deficits by printing money.”
Hard to argue this is a bad thing. Enough of these endless wars.
“When those loans went bad and people demanded their money back, banks failed, the money supply contracted, and the economy fell into a recession.”
Again, this is not a bad thing. For example, if all the TBTF banks failed in 2008 and all that debt was written off, wouldn’t we all be better off?
“Governments routinely suspended gold convertibility to finance wartime deficits. But if those deficits resulted in inflation, returning to the prewar price level required deflation, austerity and usually recession”
That sounds harsh, but it really comes down to timing. Adjust regularly and the correction is painful but short lived. Or keep putting the correction off, and see a long, painful currency crisis.
You will get one or the other, it just comes down to when. All fiat currencies fail, eventually.
“For example, if all the TBTF banks failed in 2008 and all that debt was written off, wouldn’t we all be better off?”
IF the banks failed, and
IF a large portion of debt were forgiven, and
IF the economy didn’t sink into a deep long depression causing massive job losses,
THEN, sure, maybe that alternative factual scenario would be better than the actual scenario.
Too big to fail is a myth,brought on by our elected officials.Let some big companies fail on their own and it changes the dynamics of the game.
Like Lehman Bros?
Please see how Iceland handled their banking crisis as well as the recommendations from the IMF. The banks fail but they don’t go out of business. You wipe out the bond and stock holders, write down the bad debts, recapitalize the banks by selling off assets, then the government sells the stock to recoup it’s money.
This is the process which should have happened and was denied to protect the financial elite and their incumbent politicians.
Avoiding the pain of deflation is one of the reasons we abandoned the gold standard:
http://ochousingnews.g.corvida.com/wp-content/uploads/2015/02/inflation-1872-present.gif
Policymakers decided the inflation was less painful than deflation.
The government cannot tax deflation but they sure as hell can tax inflation. Inflation also lowers their borrowing costs overtime and so they can increase their reckless spending.
A Small Bank’s Big Victory
http://www.nationalmortgagenews.com/news/compliance-regulation/a-small-banks-big-victory-1065865-1.html?zkPrintable=1&nopagination=1
In the wake of the financial crisis, only one bank is believed to have faced a criminal trial on charges of mortgage fraud.
A Jury in New York state court acquitted the bank of all charges this summer. But the general reaction was not the outrage you might expect. Instead, the bank’s customers have rallied in support, as they have from the start.
The charges were dismissed in their court of public opinion long before.
That’s because the bank wasn’t a Wall Street firm, a global megabank or a subprime loan factory. It was the $250 million-asset Abacus Federal Savings Bank, which primarily serves New York’s Chinatown community.
The case has puzzled many observers, given the government’s lack of criminal prosecution of much larger potential cases of mortgage fraud leading up the financial crisis.
“Of all the banks to choose, why this one?” asks William Black, a former bank regulator who is a professor of economics and banking law at the University of Missouri.
With six offices, four of them in New York, Abacus hardly qualifies as a systemically important financial institution, arguably making it an easier target than those that some would say have a “too big to jail” label.
Though gratified with the outcome, Thomas Sung, an immigrant from China who started the bank back in 1984, takes the prosecution personally.
Ever since the ordeal began — with a phone call on the afternoon of May 30, 2012 — Sung has felt that he never got a fair shake from prosecutors. That call from the Manhattan District Attorney’s Office told him to be at the courthouse the next morning, where Abacus would be indicted for mortgage fraud and for grand larceny against Fannie Mae, the mortgage securities packager taken over by the government in 2008.
Sung says that the DA never offered his bank a deal like those routinely offered to larger banks facing prosecution by both the DA and the U.S. Justice Department — such as a settlement with no admission of guilt or perhaps a deal with a deferred prosecution agreement to assure compliance with required reforms.
The DA declined to comment on the case for this story.
Hanging up the phone that day, Sung feared that the aggressive action would, as he puts it, “kill” his bank.
“Very few small banks that have been charged with a felony have survived,” he says.
The rail-thin and energetic 81-year-old — who still serves as chairman of the privately held Abacus — sprang into action so he could break the news to his community himself. Knowing that most of the local Chinese-language press had a deadline of 5 p.m. for getting stories in the next day’s papers, he called a 4:30 p.m. press conference, alerted them about the indictment and said he planned to fight the charges.
The next morning, Sung found representatives from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. waiting at his bank’s doorstep — in case of a run on the bank, they told him. Sung says the DA, expecting a run, had warned them.
But there was no run. “The Chinese community had already read that morning that the indictment was coming and that we were going to fight the indictment,” Sung says. “When it got to be 3:30 p.m. and there was no run, the regulators left.”
It was one of Sung’s daughters, bank director Vera Sung, who spotted the problem that prompted the DA’s investigation and eventual prosecution.
She called a halt to a questionable closing in December 2009, and subsequently fired a loan officer who she found had coached a borrower to lie about her income and apparently to pay him a bribe in the process. The bank reported the incident to its then-regulator, the Office of Thrift Supervision, which caught the DA’s attention. As one of his first actions on assuming office in January 2010, Manhattan District Attorney Cyrus Vance Jr. launched an investigation into the bank’s mortgage lending practices, ultimately subpoenaing some 900,000 documents.
In April 2012, the DA brought charges against 19 low-level current and former Abacus employees, with officers making surprise pre-dawn arrests at their homes. At an arraignment proceeding in May, the DA had those people voluntarily reappear at the court building, where they were chained together as they entered the courtroom in front of invited media — an image that outraged many in Chinatown.
At the time of the indictment, Vance announced at a press conference that Abacus was guilty of “a systemic and pervasive mortgage fraud scheme,” which he said was emblematic of the kinds of loan abuses that had brought on the financial crisis.
This still stings Sung, who hastens to point out that Abacus never dabbled in mortgage derivatives and never offered mortgages with low or no down payments. All its home loans require down payments of at least 20%, and many Abacus borrowers put down much more. Even during the financial crisis, Abacus’s mortgage default rate never exceeded 0.5%.
At the four-month trial, prosecutors put on the stand a long list of bank employees and mortgage customers, most of whom were “cooperators” who had pleaded guilty and were testifying for the prosecution with the hope of winning a lighter sentence or getting their charges dropped. But their stories sometimes changed under questioning by the bank’s attorneys — and to such an extreme that the jury laughed openly more than once.
One issue in the trial centered on cultural differences in how family assistance is viewed in China compared with the United States. Here, when relatives help a family member buy a house, there’s generally a clear understanding about whether the money is a gift or a loan to be repaid, and any repayment expectations are often spelled out in writing. In China, when a relative helps an extended family member, the money is typically given as a gift. Left unspoken is that gifts are presumed to be reciprocal, though there is no expectation as to when a helping hand might be offered in return. So when mortgage applicants at Abacus listed gifts from relatives as assets, loan officers understood that the relatives had no legal claim on the money they had provided, even if they might expect to get a gift in return someday, the bank argued in its defense.
Prosecutors portrayed these gifts to jurors as being loans (which would have meant they couldn’t count as assets). But their own witnesses repeatedly denied this, undermining the DA’s case.
An official from Fannie Mae also hurt the case by testifying that it had not lost any money on the allegedly fraudulent Abacus mortgages it had purchased — and in fact, earned a profit from them. In the end, the jury voted to acquit on all 240 charges leveled against Abacus and against two midlevel loan officers who were tried along with the bank itself.
In the wake of the trial, Thomas Sung has become something of a local folk hero on the sidewalks of Chinatown. On one hot summer day a few weeks after the acquittal, as he walked several blocks from his bank to have lunch at a favorite restaurant, people kept stopping him on the sidewalk to shake his hand and congratulate him.
But the victory didn’t come cheap. Besides $10 million in legal expenses, Sung says his bank lost considerable business because of staff time spent culling through records to respond to demands from the DA for loan documents, and because during the investigation and trial, Fannie stopped buying the bank’s loans. (Immediately after the acquittal, Fannie resumed buying them.)
Kevin Jacques, a former regulator and the Murch Chair in Finance at Baldwin Wallace University, says he worries about the message that the case sends. He says fraud is very difficult to detect and banks’ cooperation is key. Though he understands going after the individuals directly responsible for criminal behavior, he questions whether institutions that discover and report such behavior as Abacus did should be taken to court.
“In this case, a bank self-reports, ‘Hey we’re having a problem here. We found some fraud in our mortgage lending. We’re reporting this and we’re going to try and get on top of it,'” Jacques says. “My hope is it doesn’t send a bad message particularly to small financial institutions, ‘Hey, wait a minute, don’t self-report because you run the risk of them coming after the entire institution, the management, the whole thing.'”
In mid-September, the DA dropped all charges against seven low-level Abacus employees who had been arrested at the time of the bank’s indictment and were still facing trials. In a brief motion to the court, the DA’s office said prosecutors no longer believed they could prove those cases “beyond a reasonable doubt.”
“Clearly jurors were going to think, ‘Why are you keeping us here?'” says Black of the Abacus acquittal, “especially when there are banks here in Manhattan that caused trillions of dollars in losses.”
It does make me wonder what the DA was thinking. Whatever political aspirations that DA had are probably toast.
He probably felt he had to do something and didn’t want to have an “accident” if he went after the big money.
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