hogsgeteaten, thank you for that one, MERS is totally new to me.
LOL, ALL will love this image on top of the article below. NOW, it is 9:45pm Friday night in Sydney 'up above land' (yep, that's SUBVERSIVE i know, then again it won't challenge the balanced .. lol .. this might .. just now i have decide to post this as ooooonnnnneeee. Why? Dunno, but, togetherness in a one world is a good, friendly feeling. A Trinity of One. Unity. One for all .. chuckle .. it was three to NOW.
My comment: So MERS was set up for the convenience of "financial entities", with the result that some 62000000+ mortgage titles are shrouded in some technological where-is-the-holder mystery, Alice land. Too bad there was NOT ONE EXPERT sniffing dog on about. You'd think ONE might have seen it coming; that SOME in 'that world' might have picked up the 'consequence' scent way back. STREWTH! REX! Where were you? (Aside: the only cop show i fair-dinkum enjoy.) LOLOL .. please share with me one little, pleasant 5 min. break.
NOW, this could be REAL COOL for some, could some mortgage hustlers really get stuck on their own petard?
Friday, August 20, 2010 "MERS: Is Your Home Foreclosure Proof?" by Ellen Brown
"Over 62 million mortgages are now held in the name of MERS, an electronic recording system devised by and for the convenience of the mortgage industry. A California bankruptcy court, following landmark cases in other jurisdictions, recently held that this electronic shortcut makes it impossible for banks to establish their ownership of property titles - and therefore to foreclose on mortgaged properties. The logical result could be 62 million homes that are foreclosure-proof.
Mortgages bundled into securities were a favorite investment of speculators at the height of the financial bubble leading up to the crash of 2008. The securities changed hands frequently, and the companies profiting from mortgage payments were often not the same parties that negotiated the loans. At the heart of this disconnect was the Mortgage Electronic Registration System, or MERS, a company that serves as the mortgagee of record for lenders, allowing properties to change hands without the necessity of recording each transfer.
MERS was convenient for the mortgage industry, but courts are now questioning the impact of all of this financial juggling when it comes to mortgage ownership. To foreclose on real property, the plaintiff must be able to establish the chain of title entitling it to relief. But MERS has acknowledged, and recent cases have held, that MERS is a mere "nominee" - an entity appointed by the true owner simply for the purpose of holding property in order to facilitate transactions.Recent court opinions stress that this defect is not just a procedural but is a substantive failure, one that is fatal to the plaintiff's legal ability to foreclose. That means hordes of victims of predatory lending could end up owning their homes free and clear - while the financial industry could end up skewered on its own sword.
California Precedent: The latest of these court decisions came down in California on May 20, 2010, in a bankruptcy case called In re Walker, Case no. 10-21656-E - 11. The court held that MERS could not foreclose because it was a mere nominee; and that as a result, plaintiff Citibank could not collect on its claim. The judge opined: "Since no evidence of MERS' ownership of the underlying note has been offered, and other courts have concluded that MERS does not own the underlying notes, this court is convinced that MERS had no interest it could transfer to Citibank. Since MERS did not own the underlying note, it could not transfer the beneficial interest of the Deed of Trust to another. Any attempt to transfer the beneficial interest of a trust deed without ownership of the underlying note is void under California law."
In support, the judge cited In Re Vargas (California Bankruptcy Court); Landmark v. Kesler (Kansas Supreme Court); LaSalle Bank v. Lamy (a New York case); and In Re Foreclosure Cases (the "Boyko" decision from Ohio Federal Court). (For more on these earlier cases, see here, here and here.) The court concluded: "Since the claimant, Citibank, has not established that it is the owner of the promissory note secured by the trust deed, Citibank is unable to assert a claim for payment in this case."
The broad impact the case could have on California foreclosures is suggested by attorney Jeff Barnes, who writes: "This opinion . . . serves as a legal basis to challenge any foreclosure in California based on a MERS assignment; to seek to void any MERS assignment of the Deed of Trust or the note to a third party for purposes of foreclosure; and should be sufficient for a borrower to not only obtain a TRO [temporary restraining order] against a Trustee's Sale, but also a Preliminary Injunction barring any sale pending any litigation filed by the borrower challenging a foreclosure based on a MERS assignment. While not binding on courts in other jurisdictions, the ruling could serve as persuasive precedent there as well, because the court cited non-bankruptcy cases related to the lack of authority of MERS, and because the opinion is consistent with prior rulings in Idaho and Nevada Bankruptcy courts on the same issue."
What Could This Mean for Homeowners? Earlier cases focused on the inability of MERS to produce a promissory note or assignment establishing that it was entitled to relief, but most courts have considered this a mere procedural defect and continue to look the other way on MERS' technical lack of standing to sue. The more recent cases, however, are looking at something more serious. If MERS is not the title holder of properties held in its name, the chain of title has been broken, and no one may have standing to sue. In MERS v. Nebraska Department of Banking and Finance, MERS insisted that it had no actionable interest in title, and the court agreed.
An August 2010 article in Mother Jones titled "Fannie and Freddie's Foreclosure Barons" exposes a widespread practice of "foreclosure mills" in backdating assignments after foreclosures have been filed. Not only is this perjury, a prosecutable offense, but if MERS was never the title holder, there is nothing to assign. The defaulting homeowners could wind up with free and clear title.
In Jacksonville, Florida, legal aid attorney April Charney has been using the missing-note argument ever since she first identified that weakness in the lenders' case in 2004. Five years later, she says, some of the homeowners she's helped are still in their homes. According to a Huffington Post article titled "'Produce the Note' Movement Helps Stall Foreclosures" : "Because of the missing ownership documentation, Charney is now starting to file quiet title actions, hoping to get her homeowner clients full title to their homes (a quiet title action 'quiets' all other claims). Charney says she's helped thousands of homeowners delay or prevent foreclosure, and trained thousands of lawyers across the country on how to protect homeowners and battle in court.
Criminal Charges? Other suits go beyond merely challenging title to alleging criminal activity. On July 26, 2010, a class action was filed in Florida seeking relief against MERS and an associated legal firm for racketeering and mail fraud. It alleges that the defendants used "the artifice of MERS to sabotage the judicial process to the detriment of borrowers;" that "to perpetuate the scheme, MERS was and is used in a way so that the average consumer, or even legal professional, can never determine who or what was or is ultimately receiving the benefits of any mortgage payments;" that the scheme depended on "the MERS artifice and the ability to generate any necessary 'assignment' which flowed from it;" and that "by engaging in a pattern of racketeering activity, specifically 'mail or wire fraud,' the Defendants . . . participated in a criminal enterprise affecting interstate commerce."
Local governments deprived of filing fees may also be getting into the act, at least through representatives suing on their behalf. Qui tam actions allow for a private party or "whistle blower" to bring suit on behalf of the government for a past or present fraud on it. In State of California ex rel. Barrett R. Bates, filed May 10, 2010, the plaintiff qui tam sued on behalf of a long list of local governments in California against MERS and a number of lenders, including Bank of America, JPMorgan Chase and Wells Fargo, for "wrongfully bypass[ing] the counties' recording requirements; divest[ing] the borrowers of the right to know who owned the promissory note . . .; and record[ing] false documents to initiate and pursue non-judicial foreclosures, and to otherwise decrease or avoid payment of fees to the Counties and the Cities where the real estate is located." The complaint notes that "MERS claims to have 'saved' at least $2.4 billion dollars in recording costs," meaning it has helped avoid billions of dollars in fees otherwise accruing to local governments. The plaintiff sues for treble damages for all recording fees not paid during the past ten years, and for civil penalties of between $5,000 and $10,000 for each unpaid or underpaid recording fee and each false document recorded during that period, potentially a hefty sum. Similar suits have been filed by the same plaintiff qui tam in Nevada and Tennessee.
By Their Own Sword: MERS' Role in the Financial Crisis: MERS is, according to its website, "an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans." Or as Karl Denninger puts it, "MERS' own website claims that it exists for the purpose of circumventing assignments and documenting ownership!"
MERS was developed in the early 1990s by a number of financial entities, including Bank of America, Countrywide, Fannie Mae, and Freddie Mac, allegedly to allow consumers to pay less for mortgage loans. That did not actually happen, but what MERS did allow was the securitization and shuffling around of mortgages behind a veil of anonymity. The result was not only to cheat local governments out of their recording fees but to defeat the purpose of the recording laws, which was to guarantee purchasers clean title. Worse, MERS facilitated an explosion of predatory lending in which lenders could not be held to account because they could not be identified, either by the preyed-upon borrowers or by the investors seduced into buying bundles of worthless mortgages. As alleged in a Nevada class action called Lopez vs. Executive Trustee Services, et al.:
"Before MERS, it would not have been possible for mortgages with no market value . . . to be sold at a profit or collateralized and sold as mortgage-backed securities. Before MERS, it would not have been possible for the Defendant banks and AIG to conceal from government regulators the extent of risk of financial losses those entities faced from the predatory origination of residential loans and the fraudulent re-sale and securitization of those otherwise non-marketable loans. Before MERS, the actual beneficiary of every Deed of Trust on every parcel in the United States and the State of Nevada could be readily ascertained by merely reviewing the public records at the local recorder's office where documents reflecting any ownership interest in real property are kept....
After MERS, . . . the servicing rights were transferred after the origination of the loan to an entity so large that communication with the servicer became difficult if not impossible .... The servicer was interested in only one thing - making a profit from the foreclosure of the borrower's residence - so that the entire predatory cycle of fraudulent origination, resale, and securitization of yet another predatory loan could occur again. This is the legacy of MERS, and the entire scheme was predicated upon the fraudulent designation of MERS as the 'beneficiary' under millions of deeds of trust in Nevada and other states."
Axing the Bankers' Money Tree: If courts overwhelmed with foreclosures decide to take up the cause, the result could be millions of struggling homeowners with the banks off their backs, and millions of homes no longer on the books of some too-big-to-fail banks. Without those assets, the banks could again be looking at bankruptcy. As was pointed out in a San Francisco Chronicle article by attorney Sean Olender following the October 2007 Boyko [pdf] decision: "The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process. ...The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail..."
Nationalization of these giant banks might be the next logical step - a step that some commentators said should have been taken in the first place. When the banking system of Sweden collapsed following a housing bubble in the 1990s, nationalization of the banks worked out very well for that country. The Swedish banks were largely privatized again when they got back on their feet, but it might be a good idea to keep some banks as publicly-owned entities, on the model of the Commonwealth Bank of Australia. For most of the 20th century it served as a "people's bank," making low interest loans to consumers and businesses through branches all over the country.
With the strengthened position of Wall Street following the 2008 bailout and the tepid 2010 banking reform bill, the U.S. is far from nationalizing its mega-banks now. But a committed homeowner movement to tear off the predatory mask called MERS could yet turn the tide. While courts are not likely to let 62 million homeowners off scot free, the defect in title created by MERS could give them significant new leverage at the bargaining table." - http://www.sott.net/articles/show/213856-People-Power-Homeowners-Rebellion-Could-62-Million-Homes-Be-Foreclosure-Proof- ••• Ellen Brown wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Ellen developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest of eleven books, she shows how the Federal Reserve and "the money trust" have usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are webofdebt.com, ellenbrown.com, and public-banking.com.
A comment: Folks, remember, if you're involved in a foreclosure process, that you should treat the banksters with the same degree of caring, compassionate understanding, eager cooperation, and respect that they've shown you. In other words, be absolutely ruthless with these bastards, just like they've been to you. - CP
October 14, 2010 .. Rolling the Dice .. LOL .. Einstein said God didn't roll dice, Bernanke will. Yup, you know what follows that dat, and you knew that, too. lol
By MIKE WHITNEY
Ben Bernanke's speech on Friday in Boston could turn out to be a real barnburner. In fact, there's a good chance the Fed chairman will announce changes in policy that will stun Wall Street and send tremors through Capital Hill. Along with another trillion or so in quantitative easing, Bernanke is likely to appeal to congress for a second round of fiscal stimulus, this time in the form of a two-year suspension of the payroll tax. That's what he figures it will take to jump-start spending and rev-up the flagging economy. It could be an extraordinary intervention.
Bernanke laid out the details in a speech he gave in May 2003 to the Japan Society of Monetary Economics, in which he outlined the policies Japan should enact to beat deflation. Here's what he said:
“Rather than proposing the more familiar inflation target, I suggest that the BOJ consider adopting a price-level target, which would imply a period of reflation to offset the effects on prices of the recent period of deflation. Second, I would like to consider an important institutional issue, which is the relationship between the condition of the Bank of Japan's balance sheet and its ability to undertake more aggressive monetary policies.... Finally, and most important, I will consider one possible strategy for ending the deflation in Japan: explicit, though temporary, cooperation between the monetary and the fiscal authorities."
There it is. Bernanke is planning to reflate asset prices, purchase more government bonds, and enlist congress's support to pump liquidity into the broader economy. It's an ambitious strategy that could push the dollar over the edge, but the alternatives are equally bleak. Bernanke knows that "at best" GDP will hover around 1 to 2 per cent through 2011 while the public grows increasingly restless about soaring unemployment. He also knows that when interest rates are stuck at zero the only way the central bank can zap the economy back to life is by increasing inflation expectations. That means, the Fed has to persuade people they've “lost it” and are planning to destroy the currency via the printing presses. It's all baloney. The Fed won't destroy the dollar. They just want to use the element of surprise to give the economy a good jolt. Gold bugs think the Fed is steering the country towards hyperinflation, but they're mistaken. It's all part of a larger calculation.
Bernanke may be a died-in-the-wool class warrior, but he's no moron. His policies are designed to overshoot in order to change expectations and get consumers out of their funk. He even says so in the speech. Here's a clip:
"A concern that one might have about price-level targeting, as opposed to more conventional inflation targeting, is that it requires a short-term inflation rate that is higher than the long-term inflation objective."
The only way to stimulate economic activity is to convince people that the dollar they presently have in their pockets will be worth less tomorrow. That's what puts the Jones's back into the minivan scuttling off to the mall. But what seems like profligate spending on the Fed's part, (QE) is really just a way of restoring the pre-crisis price level. Call it asset inflation if you want, but the bottom line is, Bernanke is not going to sit back while disinflation turns to deflation, the real value of personal debts rise, and the bankruptcies, defaults and foreclosures continue to mount. He's going to pull out all the stops and carpet bomb the economy with monetary and fiscal stimulus. Here, again, is how Bernanke lays out his thesis:
"One possible approach to ending deflation in Japan would be greater cooperation, for a limited time, between the monetary and the fiscal authorities. Specifically, the Bank of Japan should consider increasing still further its purchases of government debt, preferably in explicit conjunction with a program of tax cuts or other fiscal stimulus."
Good. So Bernanke realizes that he can't go it alone. He has to get congress on board if he wants to succeed. (which is probably why the Fed's meeting was scheduled after the midterms)
Bernanke again:
“... Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt--so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.
Under this plan, the BOJ's balance sheet is protected by the bond conversion program, and the government's concerns about its outstanding stock of debt are mitigated because increases in its debt are purchased by the BOJ rather than sold to the private sector. Moreover, consumers and businesses should be willing to spend rather than save the bulk of their tax cut: They have extra cash on hand, but--because the BOJ purchased government debt in the amount of the tax cut--no current or future debt service burden has been created to imply increased future taxes. Essentially, monetary and fiscal policies together have increased the nominal wealth of the household sector, which will increase nominal spending and hence prices."
This is truly radical, but it could work. And, the quickest way to engage the policy would be by slashing the payroll tax which would, in effect, give every working man and woman in the country a raise in pay.
Bernanke's comments are also a tacit admission that the banking system is still dysfunctional and cannot provide the credit needed for the next expansion, so he is bypassing the privately-owned system altogether and transferring money to consumers directly. Naturally, this will have a positive effect on spending and on any prospects for a recovery.
The cagey Bernanke has even concocted the public relations rationale for fending off the deficit hawks who will undoubtedly point to his plan as an example of wasteful government spending.
Bernanke:
"Isn't it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio. The BOJ's purchases would leave the nominal quantity of debt in the hands of the public unchanged, while nominal GDP would rise owing to increased nominal spending. Indeed, nothing would help reduce Japan's fiscal woes more than healthy growth in nominal GDP and hence in tax revenues.....More generally, by replacing interest-bearing debt with money, BOJ purchases of government debt lower current deficits and interest burdens and thus the public's expectations of future tax obligations."
The Bernanke plan seems to do everything except whiten teeth. But wouldn't it make more sense to restructure the banking system so the toxic assets can be removed and the banks can lend freely again? And wouldn't it be better to strengthen labor unions (so that wages keep pace with productivity) so workers can generate sufficient demand to keep the economy running smoothly without panicky injections of emergency stimulus? Of course, that would mean a truce in the ongoing class war which wouldn't fly with plutocrats who take joy in seeing the unemployment lines wind from one side of the country to the other.
Bernanke's plan could work. Congress could pass emergency legislation to suspend the payroll tax for two years stuffing hundreds of billions of dollars into the pockets of struggling consumers. The Fed could make up the difference by purchasing an equal amount of long-term Treasuries keeping the yields low while the economy resets, employment rises, asset prices balloon, and markets soar. As the economy rebounds, the dollar will steadily lose ground triggering a sharp rise in commodities and an increase in exports that will spark a clash with foreign trading partners. Then what?
Yes, Bernanke's "nuclear option" could help to resuscitate economy, but it could also erode confidence in the dollar leading to the untimely demise of the world's reserve currency. It's all a roll of the dice.
Mike Whitney lives in Washngton state. He can be reached at fergiewhitney@msn.com
TheMoneyIllusion A slightly off-center perspective on monetary problems.
This might seem like an odd question. Everyone seems to agree that Bernanke has done everything humanly possible to boost the economy. But there is a difference between doing a lot, and doing things that are effective. My hunch is that we will get a recovery soon, or perhaps I should say that is my reading of market expectations. But I see little reason to believe it will be adequate. Last month the Fed promised to buy up to a trillion dollars in bonds as a form of quantitative easing. The monetary base is higher than a month ago, but it is still lower than at the beginning of the year. The single most important thing the Fed can do right now (in addition to an interest penalty on excess reserves) is to clearly communicate its intentions to raise the five year expected inflation rate from 0.8% closer to its target of 2%. See if you think this passage from an April 14 speech by Bernanke effectively conveys the Fed’s determination to reflate:
“I mentioned earlier that the Fed’s mandate from the Congress is to foster price stability as well as maximum sustainable employment. The FOMC treats its obligation to ensure price stability extremely seriously. Price stability supports healthy economic growth, for example, by making it easier for households and businesses to plan for the future. In practice, price stability does not require that inflation be literally zero; indeed, although inflation can certainly be too high, it can also be too low. Experience suggests that inflation rates that are close to zero or even negative (corresponding to deflation, or falling prices) can at times be associated with poor economic performance. Cases in point include the United States in the 1930s and the more recent experience of Japan. In their latest quarterly projections of the economy, most members of the FOMC indicated that they would like to see an annual inflation rate of about 2 percent in the longer term. Right now, because of the weakness in economic conditions here and around the world, inflation has been running less than that, and our best forecast is that inflation will remain quite low for some time. Thus, the Fed’s proactive policy approach is not at all inconsistent with the goal of price stability in the medium term.
Although inflation seems set to be low for a while, the time will come when the economy has begun to strengthen, financial markets are healing, and the demand for goods and services, which is currently very weak, begins to increase again. At that point, the liquidity that the Fed has put into the system could begin to pose an inflationary threat unless the FOMC acts to remove some of that liquidity and raise the federal funds rate. We have a number of effective tools that will allow us to drain excess liquidity and begin to raise rates at the appropriate time; that said, unwinding or scaling down some of our special lending programs will almost certainly have to be part of our strategy for reducing policy stimulus once the recovery is under way.
We are thinking carefully about these issues; indeed, they have occupied a significant portion of recent FOMC meetings. I can assure you that monetary policy makers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so. To be sure, decisions about when and how quickly to proceed will require a careful balancing of the risk of withdrawing support before the recovery is firmly established versus the risk of allowing inflation to rise above its preferred level in the medium term. However, this delicate balancing of risks is a challenge that central banks face in the early stages of every economic recovery. I believe that we are well equipped to make those judgments appropriately. In addition, when the time comes, our ability to clearly communicate our policy goals and our assessment of the outlook will be crucial to minimizing public uncertainty about our policy decisions.”
I was OK with the first part of the first paragraph. I prefer a NGDP (or wage) target to inflation, but if he wants to define “price stability” as 2% inflation, so be it. He also recognizes the problems of undershooting the inflation target—it leads to “poor economic performance.” When he says they’d like to see an annual inflation rate of 2% in the “longer term” he loses me. Why longer term? Do they wish to see lower inflation in the short to medium term? At that point the speech becomes strangely passive. He suggests inflation will remain “quite low for some time” and then indicates in the very next sentence that that is consistent with the Fed’s goal of price stability. So now price stability doesn’t mean 2% inflation, it even includes less than 2%. This year’s forecast is for deflation. Maybe that’s price stability too. The beginning of the second paragraph is also very passive, as if the Fed is simply a spectator watching all this happen. I can’t help contrasting this with FDR’s expansionary monetary policy adopted in March 1933, which raised the WPI 14% in 4 months, and raised industrial production 57% in the same four months. FDR wasn’t passive.
In paragraph three he wakes up from his slumber. Now policy will act on a “timely basis” to prevent high inflation in the future, a problem the bond market doesn’t see. No more waiting around for “the time . . . when the economy begins to strengthen, financial markets are healing.” Now the Fed is promising to be proactive, to make it happen, to keep inflation from exceeding his target. I was dubious of Earl Thompson’s argument that central bankers had an asymmetrical reaction to inflation, but I have to admit that this supports his view.
In addition, Bernanke seems to be under the strange illusion that issuing interest-bearing reserves that are hoarded by banks represents some sort of inflationary time bomb. I don’t see it, the world’s leading expert on interest on reserves doesn’t see it, and the bond market doesn’t see it. On the other hand I see a risk of undershooting “for some time” as does the bond market and (apparently) as does the Fed. No effective policies on a “timely basis” to deal with that actual problem, but lots of policies already prepared for the imaginary problem of future high inflation.
Someone might object that I quoted selectively, that Bernanke was addressing the risk of high inflation. OK, look at the entire speech and tell me where he commits to boosting inflation, or to boosting NGDP growth.
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Printing money: an easy guide to quantitative easing
The 'unconventional tools' that the Bank of England will use to fight the financial crisis.
Published: 5:56AM GMT 06 Mar 2009
[url]www.telegraph.co.uk/telegraphtv/4942128/VIDEO-EMBED-Printing-money-Quantitative-easing-explained.html [/url][tag]Link to video [/tag]
Interest rates are now as close as they can get to zero without causing malfunctions in the financial system.
In this new world, with the Bank of England shorn of its main tool for influencing the economy, the policymakers in Threadneedle Street have to turn to unconventional tools.
Some have been tried before with differing degrees of success. But whatever the tool, the objective is clear: to keep Britain from dipping any deeper into recession and becoming trapped in a debt-driven deflation and depression, as the US was in the 1930s.
With no room to cut rates, the Bank must instead turn to direct means of influencing the money supply. This is important. The nominal growth rate of an economy can be no greater than the speed at which money is growing, and flowing around the economy. This famous economic equation – the quantity theory of money – lies behind the Bank's decision to create £150bn of money.
Whether it will succeed is another question, but Thursday's announcement means it has thrown its weight behind this new policy of quantitative easing with more weight and vigour than any other central bank in history.
THE BANK OF ENGLAND'S EMERGENCY WEAPONS
Liquidity support
How does it work? The Bank lends out money in return for collateral – usually government or company debt – to instill confidence in the market and provide cash with which to trade. It has been doing this for over a year through its Special Liquidity Scheme and its successor.
Pros The system does not meddle directly with monetary policy – so does not interfere with interest rate decisions – and it directly ensures that banks' balance sheets are kept above water.
Cons Although it addresses liquidity problems – ie. when financial institutions don't have enough cash to hand – it does not solve the credit crunch, in which banks are unwilling to lend cash at all.
Does it work? To an extent. It has ensured strains on the financial markets have eased in comparison with the early days of the crisis, but the amount banks are willing to lend remains extremely low.
Buying company debt
How does it work? The Bank buys, rather than lends against, the assets of private investors, be they pension funds, insurance groups or banks. The assets are most likely commercial paper (short-term company debt) and corporate bonds. It pays for the money from a pot of cash raised by the Government through issuing gilts – in other words without increasing the amount of cash in the system. This is what the Bank has attempted to do through the Asset Purchase Facility, and is what the Federal Reserve is doing in the US.
Pros If successful, it gets to the heart of the matter, reducing the cost of credit for companies and lubricating the capital markets for companies. Because the purchases are funded by the Government it is not particularly inflationary.
Cons It has proved very difficult for the Bank to get hold of the right type of commercial debt (in other words at a good price, and a type that won't default). Pay too little and you will leave the taxpayer facing a big bill in the coming years.
Does it work? To an extent. The Fed has bought billions of dollars worth of corporate debt, but with little impact on commercial bond spreads.
Buying gilts (Government debt)
How does it work? The Bank buys government debt off investors and banks rather than corporate debt. This is something the Bank had authorised by the Treasury yesterday. The aim is to bring longer-term interest rates down, ensuring that companies and lenders cut their own rates.
Pros: Gilts are gilt-edged, and so have very little chance of defaulting (and if the UK Government has defaulted that is a whole other kettle of fish to worry about) and there are plenty of them around, so are easy to buy.
Cons: It does not make any direct difference to companies' cost of borrowing, instead pushing down government interest rates: nice, but not the heart of the matter.
Does it work? Yes, if by that you mean getting long-term interest rates down. The Japanese did it in the past, but it has not yet been tried by the Fed.
Creating money to buy assets
How does it work? The Bank buys assets off private investors but funds those purchases by creating money (literally, with the push of a button; metaphorically, with printing presses). This is what the Government has now approved. The aim is to increase the amount of money in the economy, which will in turn increase either economic growth, inflation, or a combination of the two.
Pros: The UK faces a possible spate of debt deflation, and there are few more powerful weapons for a central bank to use than its printing presses. It can also aim to kill two birds with one stone and cut the cost of borrowing for companies by making cash more plentiful. With interest rates at zero, there are few other more powerful tools the Bank can employ.
Cons: In normal times, such a policy is potentially highly inflationary. There is every chance the Bank is unconsciously laying the ground for an uncontrollable wave of inflation in the future. Deflation is the big enemy at present but the threat may be overblown, and printing money – quantitative easing – will create a mess of unparalleled proportions to clear up afterwards.
Does it work? Yes and no. The only other time it has been used is by the Bank of Japan. As Japan is still trapped in stagnation, many say it failed. However, there is evidence the Japanese experience would have been worse had it not taken these measures. Some also argue that the BoJ was too slow to start quantitative easing.
The helicopter drop
How does it work? The bank prints money, piles it inside a helicopter, takes to the skies and scatters the cash across the nation. Suddenly, every family is richer – provided they get to the cash in time and have sharp enough elbows. This technically amounts to a tax rebate for everyone funded by money creation, and was christened a "helicopter drop" of money by economist Milton Friedman. In his eyes it was the most dramatic way for the central bank to get money out into the streets.
Pros: This instantly gets money into people's hands and, with any luck, gets them spending it in the high street. Those who don't spend can use it to pay off debt, which isn't such a bad thing either.
Cons It is so radical a policy it might scare away international investors from the UK. It displays a disregard for controlling inflation that could also send sterling plunging. It will summon up even more vivid comparisons with Zimbabwe and Weimar Germany.
Does it work? It has never been properly tried before. The Japanese and Koreans have experimented with issuing vouchers to their citizens in the hope of encouraging them to spend but these were – importantly – not funded with created money. Fed Chairman Ben Bernanke is convinced, however, that in desperandum it would pump up a deflated economy.
Oct. 19 (Bloomberg) -- Neil Dwane, chief investment officer for Europe at Allianz Global Investors' RCM unit, talks about his strategy for financial stocks and corporate bonds. He speaks with Francine Lacqua on Bloomberg Television's "On The Move." (Source: Bloomberg)
The mortgage-bond market shows investors are shrugging off speculation the U.S. is in the throes of a foreclosure-document crisis.
Bonds tied to home loans on which borrowers often failed to document their incomes or on properties they didn’t plan to live in were up 1 cent at 64 cents on the dollar at the end of last week from a month earlier, according to Barclays Capital. The most-senior securities backed by so-called Alt-A mortgages with a few years of fixed rates have climbed 31 cents from a record low last March.
Federal officials including Treasury Secretary Timothy Geithner say delays in foreclosures, as attorneys general in 50 states investigate allegations of falsified documents, won’t lead to a moratorium on property seizures. Lenders eventually will be able to take back houses in almost all cases because homeowners have missed payments and the records aren’t that seriously flawed, according to TCW Group Inc.’s Bryan Whalen.
“Maybe it’s going to take a few extra months to shore up the paperwork, but let’s not take our eyes off the reality of the situation,” said Whalen, co-head of the mortgage-backed bond group at Los Angeles-based TCW, which oversees $115 billion in assets. “These aren’t people, by and large, who deserve to be in their homes.”
Prices are little changed across the $1.4 trillion market for so-called non-agency mortgage securities, which lack government backing and also include bonds tied to subprime loans, option adjustable-rate mortgages and jumbo debt, even after servicers including Ally Financial Inc. and Bank of America Corp. halted foreclosures or evictions.
Seized Properties
Expectations that delays in foreclosures will be limited are helping to support prices for the securities, TCW’s Whalen said. About 26 percent of the loans underlying the securities are at least 60 days late, in foreclosure proceedings or already backed by seized properties, according to data compiled by Bloomberg.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 168 basis points, or 1.68 percentage points, down 13 basis points since Aug. 31, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.41 percent, down from 3.43 percent at the end of last week.
PepsiCo Inc., the world’s largest snack-food maker, may sell debt in a three-part benchmark offering, according to a person familiar with the transaction. The sale may include 3-, 10- and 30-year bonds and occur as soon as today, said the person, who declined to be identified because terms aren’t set. Benchmark sales are typically at least $500 million.
Markit CDX Index
An indicator of corporate credit risk in the U.S. climbed for the fourth time in six days. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.81 basis point to a mid-price of 97.67 basis points as of 12 p.m. in New York, according to index administrator Markit Group Ltd.
The index, which typically rises as investor confidence deteriorates and falls as it improves, touched the lowest in more than five months Oct. 13 at 95.5 basis points. In London, the Markit iTraxx Europe Index of 125 companies with investment- grade ratings fell 1.16 to 101.21.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
Mortgage-Bond Losses
Losses for mortgage-bond holders typically increase from when homeowners stop making monthly payments to when the debt is liquidated, such as through sales of seized properties.
The longer the process takes, the higher the bill for property taxes, insurance and maintenance. Extended timelines also increase the amount that loan servicers advance to cover borrowers’ missed principal and interest payments, benefiting junior-ranked securities that might otherwise go unpaid and later hurting investors in senior bonds.
Estimates for the harm to the value of senior bonds include a reduction of 1 cent on the dollar for an Alt-A bond for three months of delays to foreclosures, according to Whalen. In an Oct. 15 report, JPMorgan analysts estimated a drop of 4 cents for a note with a six-month extension.
Bondholders were already bracing for longer timelines as foreclosures overwhelmed servicers and the government pushed for borrowers to get reworked debt, according to Seer Capital Management LP Chief Executive Officer Philip Weingord, whose hedge-fund firm oversees about $300 million.
“So I’m not going to assume it takes three years but instead three years and four months? It’s not going to change things much,” Weingord, the former head of global markets in the Americas for Deutsche Bank AG, said in a Sept. 30 interview in New York.
Dealer Auctions
Dealer auctions of non-agency mortgage securities on behalf of investors reached about $6 billion during each of the past two weeks, double the pace from the preceding few weeks, Bank of America analysts wrote in an Oct. 17 report.
As investors sought to sell, senior securities backed by option ARMs, whose minimum payments result in growing loan balances, were unchanged over the past month at 59 cents on the dollar, compared with a record low of 33 cents in March 2009. Bonds backed by fixed-rate jumbo mortgages, or larger than government-supported Fannie Mae and Freddie Mac can finance, were unchanged at 89 cents, up from 63 cents in March 2009.
‘Very Damaging’
Geithner said in an Oct. 12 interview on “Charlie Rose” that the Obama administration wasn’t prepared to call for a nationwide moratorium on foreclosures because it would be “very damaging” to U.S. homeowners and the real-estate market.
The Association of Mortgage Investors, a Washington-based trade group, on Oct. 1 said home-loan securities trustees should try to ensure that loan servicers, not bondholders, bear the damage of the servicers’ inappropriate policies. Ally and JPMorgan said their employees may have completed affidavits without confirming their accuracy.
Because “bond prospectuses list an extended foreclosure if some of the documents are missing as a potential risk,” investors may not be able to force loans to be repurchased by lenders or bond creators “if the trust can eventually foreclose,” Barclays Capital analysts said in an Oct. 15 report.
Missing Documents
In the “less likely” situation where foreclosure can’t be completed because of missing documents, investors may be able to force repurchases, even though in some cases the responsible lenders may be out of business, particularly with subprime debt, analysts Sandeep Bordia, Jasraj Vaidya and Sandipan Deb wrote.
Bondholders aren’t worried about the validity of the Mortgage Electronic Registration System, or MERS, which is used to track the ownership of home loans, because it’s withstood court challenges, TCW’s Whalen said.
It’s unlikely a large number of mortgage notes are completely missing and nonsense to worry that loans weren’t properly transferred to mortgage-bond trusts because of blank endorsements, potentially invalidating tax benefits, said Tom Deutsch, executive director of the American Securitization Forum, a New York-based trade group.
“My sense is it’s more anecdotal than systemic,” he said.
To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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