The Federal Reserve continues its program of injecting money into the economy. This is accomplished in several ways. The first way referred to in the quotes below gets money to banks with the idea that the banks will then loan it out to customers. Of course, that may or may not be the result. That is, no one can make the customers borrow money if their mood has soured to the point that they do not want more debt.

Also, the banks themselves may be so concerned about the bank regulators and how they categorize loans, that they may have tightened up on lending to the point that whether they have the money to lend or not, no one can qualify for any new loans. Finally, the money meant to be the source of new loans may instead be covering losses on old loans. But nonetheless, the Fed has planned 3 more auctions of debt.

"The Fed said it will conduct three auctions in June, with each one making $75 billion available in short-term cash loans. Banks can bid for a slice of the available funds. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.
…
Also Thursday, the Fed -- in a separate program -- auctioned $16.4 billion in safe Treasury securities to investment firms, another effort aimed at easing credit problems. That operation drew bids less than the $25 billion being made available, which could be viewed as a sign of some improvement in credit conditions.

In exchange for the 28-day loans of Treasury securities, bidding firms put up as collateral more risky investments, including certain shunned mortgage -backed securities and bonds backed by federally guaranteed student loans. This program began March 27."

Here is a link to the entire article:
http://biz.yahoo.com/ap/080529/fed_credit_crisis.html?.v=3

Michael

The FBI has been working with the Securities and Exchange Commission in investigating over 1,300 mortgage fraud cases and 19 corporate investigations. Some interesting statistics were released yesterday in an FBI report concerning fraud cases linked to the subprime lending crisis.

Year Cases Pursued Indictments Convictions Restitution Recovered

2007 1,204 321 206 $595.9 million $22 million

2006 818 263 204 $388.9 Million $1.4 million

Given today's housing market, it is a perfect opportunity for fraud. The most common types of cases are identity theft, misrepresentation of income or assets, forged documents, misrepresentation of occupancy, and inflated appraisals.

You can review the entire article at: http://www.washingtonpost.com/wp-dyn/content/article/2008/05/22/AR2008052203755_pf.html

JMM, PC, recently represented a trustee in a case involving allegations of a forged dead and inflated appraisal of real property. Our firm successfully recovered a significant amount to pay all the creditors in full with intestest.

Chandra

Vallejo, California filed for bankruptcy protection under Chapter 9 (available only to municipalities and a form of reorganization, not liquidation) last Friday in the Eastern District of California. The city has been struggling with personnel costs and low taxes from the housing market. The voluntary petition estimates between one to five thousand creditors, $500 million and $1 billion in assets, and $100 to $500 million in debt. The largest claim for $219,300,816 (which accounts for over half of the total) is for the city retirees.

As you might know, we have been following the potential bankruptcy filing for the city for several months now. The city has been negotiating with the unions for the past year concerning wage cuts to keep the city out of bankruptcy. The financial audits conducted for the city have shown that it would run out of money in its operating account by the end of June.

Vallejo is the largest city ever to file for bankruptcy protection in California; with over 120,000 residents. The most famous Chapter 9 filing was by Orange County, California filed on December 6, 1994. The county treasurer lost $1.7 billion of the investment pool on Wall Street securities. The county didn't emerge from the reorganization for 18 months.

Other California cities that have filed for bankruptcy under Chapter 9 are:

Coalinga in 2003 with a population of approximately 12,000;
Desert Hot Springs in 2001 with a population of approximately 17,000;
Dinuba in 2001 with a population of approximately 17,000; and
Calexico in 1995 with a population of approximately 19,000.

Vallejo is the birth city of several famous individuals, actor Raymond Burr and musicians Roy Rogers and E-40, just to name a few.

You can read an article discussing the filing at:
http://amlawdaily.typepad.com/amlawdaily/2008/05/vallejo-turns-t.html

Chandra

In late February we discussed the city of Vallejo in California that was contemplating on filing Chapter 9 Bankruptcy. Tuesday night the City Council unanimously agreed to the bankruptcy filing after the two-month long mediation sessions with unions failed to balance the fiscal plan long-term. The city public information officer, JoAnn West, stated, "[t]here's an issue of timeliness here. We need to get into bankruptcy court as quickly as possible before we run out of money". The city had initially predicted it would run out of money from it's general fund for expenses by the end of March.

Mayor Osby Davis warned the residents they would "be asked to approve tax increases and other revenue enhancements". If you remember, the city public safety workers received 15% raises in 2006, which some of the residents believed contributed to the city's impending insolvency. On July 1, those safety workers (police and firefighters) are scheduled to receive 5.5 percent raises while the other city employee groups are expecting a 3 percent raise.

Employee wages are to be frozen at current levels, and rollbacks that the unions agreed to in March of 6 percent could be restored. Currently, according to the city financial report, the salary and benefits are:

police captain earns $306,583;
police lieutenant gets $240,146;
fire caption earns $206,890; and
firefighters earn an average of $171,250.

State senators Pat Wiggins and Noreen Evans stated they would try to help the city with grants, and sale tax money. Bankruptcy attorneys predict that other cities hit hard by the mortgage crisis will be watching as Vallejo moves into bankruptcy. Senator Evans is worried that other cities my try and "follow suit" stating Vallejo has "made it easier for other cities to do the same thing." Bankruptcy expert Sajan George is hopeful that "Vallejo will emerge on a sound and solid financial footing" with time to rework expensive labor contracts and a budget that will work for the city.

You can read the entire article at: http://www.thereporter.com/ci_9192460?source=rss

Chandra

Many Americans are trying to work out new loans for their mortgages to avoid foreclosure--no surprise there. An article at CNNMoney.com gives an explanation that might explain why some Americans are finding it difficult to accomplish this task. The person who will decide whether or not the homeowner will get a new loan is a person called a "servicer". These individuals are hired to process mortgage payments and manage loans, but they are not the owners of the notes.

These intermediaries are paid anywhere from 0.25% to 0.50% (for subprime loans) of the monthly mortgage payments to process those payments and funnel the rest to the investors that hold the securities backed by the mortgage. As such, they have little incentive to work out new loans when they get to keep the profits from late fees. Some servicers have been accused of holding up posting mortgage payments until past the due date so that they could collect these extra charges.

There are other factors that discourage servicers from doing workouts. They have a contractual fiduciary obligation to take action to maximize the return to the security holders. Because of these contractual obligations and the type of modifications they can offer; it sometimes requires a servicer to pursue foreclosures. There are also tax issues to consider from the tax exempt loan pools. If the percentage of loan modifications exceed 5% that could jeopardize the trust's tax-exempt status. Another factor is frankly sheer volume. There is such a demand that the servicers cannot keep up. Mortgage delinquencies are up 112% during the first three months of 2008 compared to the same period last year.

Article: http://money.cnn.com/2008/05/15/real_estate/servicers_who_are_they/?postversion=2008051507

Chandra