If the Commission really does want to learn WHO knew what, when, then they’re interviewing the wrong people.

They need to interview the line workers. Mortgage loan processors, managers, escrow closers, underwriters from the banks, private mortgage insurance companies as well as wholesale lending, loan servicing default and loss mitigation workers and even consumers. Seasoned mortgage industry veterans who have proof in the form of saved memos or emails, that they informed senior management of the red flags, predatory lending, and the insane relaxation of underwriting guidelines that started to pop up as early as 2001 and 2002 yet were ignored or whose concerns were dismissed.

I am willing to bet that if the commission opened up a public comment period for testimony, they would have all the evidence they need to prove all these hoocoodanode banksters definitely did know but their own pay and bonus structure set up an external incentive to keep the dice rolling. Who wants to be a Debbie Downer CEO and be the first banker to take away the punch bowl when the money party is still going full on? Anyone? Anyone”¦Buehler?

Read it all (hat tip: Calculated Risk).

American families were squeezed last year as their inflation-adjusted weekly wages fell 1.6 percent — the sharpest drop since 1990 — well below the 2.7 percent consumer inflation rate.

Consumers’ spending power sank in the face of falling wages, job losses and higher prices for energy, medical care and education. Slack pay and scarce job creation are slowing consumer spending, hindering the economy’s ability to mount a strong recovery.

Read it all.

Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.

–Reuven Glick and Kevin J. Lansing of the Federal Reserve Bank of San Francisco in a very important recent paper

Sen. Bob Corker (R-Tenn.) ”” a member of the Senate Banking Committee ”” sent a letter to Treasury Secretary Tim Geithner Monday with a list of questions regarding what the Republican called a “blank check” to Fannie Mae and Freddie Mac.

In the letter, Corker criticized the Treasury’s removal of a cap on credit available to the two government-backed firms that were in at the nexus of the mortgage crisis.

“On Dec. 24, 2009, the United States Department of the Treasury announced amendments to the Preferred Stock Purchase Agreements it has with the government-sponsored enterprises Fannie Mae and Freddie Mac. Those amendments removed the $200 billion per enterprise cap ($400 billion total) and, in effect, wrote a blank check for the amount of ‘credit’ that will be made available to the two mortgage giants,” the letter reads.

Read it all.

I happened to catch this yesterday during lunch. Watch it carefully and watch it all. Listen attentively to his idea of the possibility of the emergence of a new business model which poses huge issues for employment going forward–KSH.

Beginning last January, The New York Times made regular visits to Beth Court, about 60 miles east of downtown Los Angeles, to chronicle how the foreclosure crisis had reshaped a middle-class neighborhood. Four of the eight houses went through foreclosure, and the others barely escaped the same fate. Beth Court was a microcosm of a nation in deep recession, a block of neighbors whose bad choices ”” often with the complicity of lending agencies ”” came crashing into a global economic downturn.

Now, a year later, California’s unemployment rate continues to grow, its housing market remains depressed and the state’s fiscal situation is dire. But the economic and policy shifts that are slowly changing parts of the country are also making a mark here.

Mr. Winkler, a factory worker, was hired at the end of September by Kimberly-Clark at the company’s mill in Fullerton, about 50 miles from here. He had gone more than year without a job….

Read it all.

Banks and other lenders are still foreclosing on Americans’ homes at a rate that’s outpacing the Obama administration’s main effort to stem the crisis.

In fact, while the Treasury Department’s Home Affordable Modification Program, or HAMP, has started the mortgage modification process on almost 760,000 homeowners who are at risk of losing their homes, less than 5 percent of those workouts have become permanent, government data show.

“HAMP has made only limited progress for nine months now, and the residential foreclosure crisis continues to mount,” said Richard Neiman, the superintendent of banks in New York state and a member of the Congressional Oversight Panel that was formed to monitor the Treasury bank bailout funds that support the mortgage program. He was appointed to the post by the Democratic leadership in the House of Representatives.

Read the whole article.

Manufacturing expanded in the United States in December, the fifth straight month of gains, amplifying hopes that a job market hobbled by double-digit unemployment might finally be adding paychecks. New jobless claims slipped markedly last week. Some economists think data to be released on Friday will show the economy gained jobs in December, the first monthly net increase in two years.

“We’re really coming back,” said Allen Sinai, chief global economist at the research firm Decision Economics. “The expansion is picking up the pace….”

But many economists remain worried that momentum could soon weaken, with the economy sliding back into glum times.

Indeed, the only area in which economists can reliably declare expansion is in the supply of competing narratives about the economy ”” perhaps to be expected in any transition between downturn and the inevitable turn for better.

“That is always the nature of the boomlet after recession,” Mr. Sinai said. “People think it’s going to fade away.”

Read it all.

Happy New Year, readers, but before we get on with the debates of 2010, there’s still some ugly 2009 business to report: To wit, the Treasury’s Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.

The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses””a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: “We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury.”

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures.

Read it all and there is more from John Huffman here.

Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers ”” who are $11 trillion poorer than they were before the housing bust ”” are in no position to return to the buy-now-save-never habits of yore.

What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

Read it all.

For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different.

The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation’s growth.

It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism — there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.

Read it all.

This is the culmination of an unprecedented policy disaster, inflicted on the American taxpayer by congressional supporters of Fannie and Freddie who refused over many years to approve new and tougher regulations for the two GSEs. Now that many of these folks are in charge of the House and Senate committees that deal with financial reform, they have suddenly found new respect for regulation and are trying to apply it to the entire financial system. Perhaps the American taxpayers, acting as voters in 2010, will decide that one disaster per career is all they should be allowed.

Read it all.

From the New York Federal Reserve:

After rising for a decade, the U.S. homeownership rate peaked at 69 percent in the third quarter of 2006. Over the next two and a half years, as home prices fell in many parts of the country and the unemployment rate rose sharply, the homeownership rate declined by 1.7 percentage points. An important question is, how much more will this rate decline over the current economic downturn? To address this question, we propose the concept of the “homeownership gap” as a gauge of downward pressure on the homeownership rate. We define the homeownership gap as the difference between the “official” homeownership rate and a recomputed rate that excludes owners who are in a negative equity position, meaning that the value of their houses is less than their outstanding mortgage balance. Our estimate of this gap suggests that the official homeownership rate will likely experience significant downward pressure in the coming years.

(Follow the link for a link to the full paper).

Check it out (the “total column”).

Note: The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The financial obligations ratio (FOR) adds automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments to the debt service ratio.

The good news is it is moving in the right direction–KSH.

Though the four are not in all the same businesses, they were caught in one of the same traps: They sold mortgage guarantees ”” in some cases to each other. Now when homeowners default, as they are doing in record numbers, these companies are covering the losses. Essentially, taxpayer money to these companies is being used partly to protect banks and other investors who own the mortgages.

Like the big banks, these four companies would no doubt prefer to be free of government assistance, which comes with pay and other restrictions on their executives. But they appear at risk of getting onto a debt merry-go-round, where they have to draw new money from the government just to keep up with their existing government debts.

Fannie Mae recently warned, for example, that it could not pay the dividends it owes the Treasury, so “future dividend payments will be effectively funded with equity drawn from the Treasury.”

All the companies have recently drawn new government money or are in talks to do so…

Read it all.

The last two quarters were even more extreme: Productivity in the nonfarm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically innovative and entrepreneurial in the history of the United States. Two: Fearful businesses pared payrolls to the bone. If the second is closer to the truth, payrolls are extraordinarily lean right now. Which means that firms will need to hire more workers as their sales and production grow. Which means that employment may start growing sooner than the pessimists think.

I have been pointing this out for months, but until the last employment report, it was a hypothesis supported by no evidence. Not anymore. While payrolls continued to decline in November, it was by only a scant 11,000 jobs; and the job counts for September and October were revised upward. The data now show a clear trend that suggests that net job creation may be only a month or two away. We’ll see.

There is more to the case for optimism. For one thing, less than 30% of February’s $787 billion fiscal stimulus has been spent to date; over 70% is still in the pipeline. Pessimists dote on the fact that the rate of increase of stimulus spending has probably peaked and will be lower in 2010. True. But the level of GDP will continue to get support from fiscal policy, and a second job-creation package (“Please don’t call it a stimulus!”) looks to be in the works.

Read it all.

Others on Ms. [Shana] Richey’s block have made similar moves [to default, and then to rent]. Mr. [Jay] Fernandez, the firefighter, moved into 3139 in July, after stopping the $4,800 monthly payments on the home he owned around the corner on Champion Way….

With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn’t when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.

“I don’t know if I’ll buy another house again, because it’s such a huge headache,” he says.

Read it all.

[She was] a single mother of four who wanted a house….in the heady days of the mortgage boom….She only knew that there seemed to be possibilities, even to those with little means such as herself, which is how a woman who had never paid more than $700 a month in rent and who had relied in recent years on Section 8 housing vouchers suddenly owned a house.

A four-bedroom house.

With 3 1/2 bathrooms. And walk-in closets, black granite countertops and a fireplace.

And a sale price of $698,000.

How White was able to buy this house — and the havoc that doing so wrought — is the story of a moment in time when all of the old rules about home-buying suddenly disappeared. It happened even though smart people knew better. It happened in White’s case even though the college-educated day-care provider knew deep down that she was not ready. In the expansiveness of the boom, it was easy to believe. And tens of thousands of people did.

Incredible, except it really happened. It boggles the mind. Read it all.

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn’t expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Read it all.

While the F.H.A. is certainly strengthening the high-end market in the Bay Area by prompting more sales, there are growing concerns that it might become a destabilizing force.

Kenneth Donohue, inspector general for the Department of Housing and Urban Development, the parent agency of the F.H.A., said the higher loan limits were increasing the potential risk to the F.H.A. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.

“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?”

He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.

I honestly feel some days like I am living on Mars, I simply cannot believe what is occurring in my own country. Read it all.

Christopher Hall stepped tentatively through the entranceway of City Hall Courtroom 676 and took his place among dozens of others confronting foreclosure purgatory. His hopes all but extinguished, he fully expected the morning to end with a final indignity: He would sign over the deed to his house ”” his grandfather’s two-story row house; the only house in which he had ever lived; the house where he had raised three children.

“This is devastating,” he said last month as he sat in the gallery awaiting his hearing. “This is my childhood home. I grew up there. My mother passed away there. My grandfather passed away there. All of my memories are there.”

A union roofer, Mr. Hall, 42, had not worked since August 2008, when the contractor that employed him as a foreman went broke and laid off more than 40 people. He had not made a mortgage payment in more than a year, and his lender, Bank of America, was threatening to auction off his house through the sheriff’s office.

In most American cities, that probably would have been the end of the story: another home turned into distressed bank inventory by the national foreclosure crisis. But in Philadelphia, under a program begun last year to try to keep people in their homes, Mr. Hall entered the courtroom with a reasonable chance of hanging on.

Read it all.

Watch it all.

For the country [ofAmerica] as a whole…homebuyers have paid no more than the old-fashioned standard of 25% of their incomes for housing in any year since 1985. Renters have in recent years paid a somewhat higher percentage of their smaller incomes but not more than 30% in any year over the past several decades.

Neither by comparison with the recent past nor by comparison with other countries today is most housing in the United States unaffordable. The median-priced home in the United States as a whole is 3.6 times the median income of Americans. For Great Britain, the median-priced home is 5.5 times the median income and, in Australia and New Zealand, the ratio of home prices to income is 6.3.

Acknowledging this reality would cause a widely accepted vision, and the national crusades and policies built upon it, to collapse like a house of cards. Instead, facts that would undermine this vision and this political crusade have been largely ignored.

Read it all.

The FHA’s finances are in a much worse state than previously thought, we discovered this week. Congress mandated that it must always maintain cash reserves of 2 per cent of the mortgages it insures, but these have fallen to 0.53 per cent. Meanwhile, the percentage of loans seriously in arrears has risen to 17.9 per cent.

Reversing its previous position, the agency said that, if the economic recovery goes into reverse, it might well have to increase the line of credit it has with the US Treasury, perhaps by $1.6bn in 2011. It says that this would only be a problem in a serious double-dip recession, but we know from the Fannie Mae and Freddie Mac debacle that the government’s housing market experts are prone to crunching the numbers optimistically.

Why have things deteriorated so fast? The reason is that the FHA has been ramping up its activities in the past two years. As the private sub-prime mortgage market collapsed, the agency stepped in to provide financing options for the “good” sub-prime borrowers who at least could prove their income. From insuring less than 2 per cent of the market in 2006, the FHA now puts its effective government guarantee behind one in four new US mortgages.

Read it all.

For the first time in four decades in the luxury-home business, executives at John Wieland builders are thinking the unthinkable: Maybe houses in the South don’t really need a fireplace.

They’re also wondering whether new homes require 4,700 square feet of living space. Or private theaters with 100-inch screens. Or super-size-me foyers.

As they draw up blueprints for the house of the post-recession future, builders are struggling to distinguish among what home buyers need, what they want and what they can live without — Jacuzzi by Jacuzzi, butler’s pantry by butler’s pantry.

“You have to keep taking things out until you hit a critical point where people reject your product,” said Jeff Kingsfield, senior vice president of sales at Smyrna-based John Wieland Homes & Neighborhoods.

Read it all.

Americans are growing increasingly pessimistic about the economy after a mild upswing of attitudes in September. But Republicans haven’t been able to profit politically from the economic gloom, according to a new Wall Street Journal/NBC News poll.

The survey found a country in a decidedly negative mood, nearly a year after the election of President Obama. For the first time during the Obama presidency, a majority of Americans sees the country as being on the wrong track.

Fifty-eight percent of those polled say the economic slide still has a ways to go, up from 52% in September and back to the level of pessimism expressed in July. Only 29% said the economy had “pretty much hit bottom,” down from 35% last month.

Read it all.

The Church of England appears set to take a $70 million loss in the US real estate market, losing its entire investment in New York City’s Stuyvesant Town/Peter Cooper Village apartment complex.

On Oct 14 the Wall Street Journal reported the partnership venture led by Tishman Speyer Properties that purchased the 56-building, 11,000-unit residential complex in lower Manhattan was in danger of default. As of the end of September, the Journal reported, the partnership had $33.7 million left of $400 million in interest reserves to service its debt. With a ”˜burn rate’ of $16 million per month, real estate analysts predict the project will be in default by year’s end.

At the height of the Manhattan property market, the Church Commissioners of the Church of England invested $70 million as equity partners in the project, alongside the California Public Employees Retirement System which invested $500 million, and the Florida State Board of Administration which committed $250 million to the deal.

Read it all.

The trial promises to be a bitter fight between prosecutors, who accuse the pair of lying and manipulating evidence, and defence lawyers, who say the men are being made scapegoats for a financial crisis that was not of their making. The outcome could also be a harbinger of things to come, as the US Justice Department considers bringing cases against even bigger fish on Wall Street.

“This is not a revenge opportunity,” the 75-year-old judge, Frederic Block, had told prospective jurors. Neither Mr Cioffi nor Mr Tannin is charged with “causing” the credit crisis. They are charged with behaving dishonestly when the crisis began to break. The pair were traders in mortgage securities, curators of two hedge funds that invested in debt which is now known to have been toxic but which had seemed to promise great riches. They worked at the long end of the chain that stretched from overheated housing markets in the south and west of the US, where millions of buyers were tempted into taking on mortgages they could not afford.

Those mortgages were sliced and diced by Wall Street and turned into securities which could be bought and sold as if they were shares. Credit rating agencies had certified the Bear Stearns funds’ mortgage derivative portfolio as super-safe; the defendants’ superiors at Bear Stearns and the funds’ outside investors believed they were taking little risk. The question is when the two managers realised this was far from true.

Read it all.

First, consumer indebtedness is still too high relative to income expectations and credit availability, particularly in the US and the UK. This inconsistency will hold back any sustainable bounce in the most important component of aggregate demand.

Second, some banks’ balance sheets are still too geared for the comfort of regulators or their own managers. This will inhibit them from lending to the real economy at a time when certain sectors (such as commercial real estate, but also residential housing) still require significant refinancing, and when consumers need time to work down their excessive debt loads.

Third, unemployment has risen well beyond expectations, and is likely to prove unusually protracted. It will take years for US unemployment to return to its natural rate, even after the natural rate shifted upwards. This will dampen the recovery of consumption and investment, stress social contracts that assume flexible labour markets, and endanger political support for essential structural reforms.

Finally, public debt has grown so rapidly as to spark concerns about future debt dynamics….

Read it all.

If any cultural factor predisposed blacks to fall for risky loans, it was one widely shared with whites ”” a penchant for “positive thinking” and unwarranted optimism, which takes the theological form of the “prosperity gospel.” Since “God wants to prosper you,” all you have to do to get something is “name it and claim it.” A 2000 DVD from the black evangelist Creflo Dollar featured African-American parishioners shouting, “I want my stuff ”” right now!”

Joel Osteen, the white megachurch pastor who draws 40,000 worshippers each Sunday, about two-thirds of them black and Latino, likes to relate how he himself succumbed to God’s urgings ”” conveyed by his wife ”” to upgrade to a larger house. According to Jonathan Walton, a religion professor at the University of California at Riverside, pastors like Mr. Osteen reassured people about subprime mortgages by getting them to believe that “God caused the bank to ignore my credit score and bless me with my first house.” If African-Americans made any collective mistake in the mid-’00s, it was to embrace white culture too enthusiastically, and substitute the individual wish-fulfillment promoted by Norman Vincent Peale for the collective-action message of Martin Luther King.

But you didn’t need a dodgy mortgage to be wiped out by the subprime crisis and ensuing recession. Black unemployment is now at 15.1 percent, compared with 8.9 percent for whites. In New York City, black unemployment has been rising four times as fast as that of whites. By 2010, according to Lawrence Mishel of the Economic Policy Institute, 40 percent of African-Americans nationwide will have endured patches of unemployment or underemployment.

One result is that blacks are being hit by a second wave of foreclosures caused by unemployment.

This makes the heart very sad–read it all.