Housing Regulator Nears Decision On Principal Forgiveness

Collections & Credit Risk | Thursday, April 5, 2012

A decision by the Federal Housing Finance Agency on whether it will allow principal reduction on loans owned by Fannie Mae and Freddie Mac is imminent, the agency’s leader said Wednesday.

Edward DeMarco, acting director of the agency, said FHFA would make a final determination later this month, a resolution that Treasury Secretary Tim Geithner hinted at during congressional hearings last month.

“We are currently evaluating the recent Treasury Department proposal to HAMP regarding principal forgiveness and expect a decision this month,” DeMarco said in a speech before the Boston Security Analysts Society.

Most observers suspect that Fannie and Freddie will wind up doing more principal write-downs, but it will likely be fairly modest in both size and scope.

“The handwriting is on the wall,” said Brian Gardner, a political analyst with Keefe, Bruyette & Woods. “In some ways, it will be consistent with everything else in housing and all the different policies and iterations of policies, it’ll be incremental. We’ve haven’t seen major shifts. We’ve seen modest steps along the way.”

Principal reductions have emerged as a crucial issue in efforts to work out troubled loans threatened by foreclosure. An array of experts and officials have cited research showing write-downs as perhaps the only broad-based way to resolve bad credits short of mass foreclosures. But the government-sponsored enterprises, as well as others in the industry, have resisted such reductions.

In a sign of growing dissent, 30 U.S. senators sent a letter to DeMarco on Wednesday urging him to provide Congress within 30 days with accurate analysis of the effects on taxpayers of using principal forgiveness compared to other modification programs.

“We believe that FHFA must be fully transparent with this new analysis and look at targeted solutions for borrowers in different situations, rather than the ‘all or nothing’ approach that was used in the previous analysis,” wrote Sen. Robert Menedez, D-N.J. chairman of the housing subcommittee and others.

In January, the agency, which regulates Fannie and Freddie, was asked by Treasury to reexamine its position on forgiving struggling borrowers’ mortgages based on a new set of incentives included under the Obama administration’s revamped Home Affordable Modification Program.

The White House is hoping that significant changes to the program will help extend its reach in the number of borrowers it can help refinance into cheaper loans.

But ultimately the final outcome will rest with DeMarco, a fact even Geithner acknowledged last month.

“The administration does not have any authority to compel the FHFA to undertake specific activities and under the conservatorship mandate they will have to make sure they meet a very tough test, appropriately so,” said Geithner at a recent hearing. “He’ll have to make these choices.”

Still, that hasn’t stopped the administration from trying to wield its influence on the final outcome.

A blog post by Michael Stegman, a counselor to Geithner on housing finance policy, sought to rebut recent claims that large banks will receive a windfall if the GSEs reduce the principal balance on first-lien mortgages they own. Taxpayers, he said, would be protected from this result, based on the alternative modification program Treasury has asked FHFA to examine.

Analysts said that Treasury has been pressuring DeMarco to change his position, even if slightly.

“Treasury absolutely wants this to happen and is in active conversation with FHFA,” said Edward Mills, a financial policy analyst at FBR Capital Markets. “They’re looking to try to figure out what gets DeMarco to yes.”

The trouble that may arise, however, is that under Treasury’s triple incentive program there will be some cases were principal reduction makes sense, but other cases where it doesn’t, depending on a borrowers’ loan-to-value ratio and length of delinquency. That could derail efforts to get DeMarco on board.

It will be a critical decision how policymakers discern whether it will be acceptable to apply principal reductions only to certain loans, the whole program, or none at all.

“At the end of the day, I think there is going to be some way of doing principal reduction,” said Mills. “I don’t think the program that Treasury has announced is going to do enough to meet what Ed DeMarco and what FHFA needed to see to sign on to it. I think there’s going to be some level of negotiations, back and forth, where they are going to be able to use principal reduction as a tool, but not as a requirement.”

DeMarco has been sharply criticized for his reluctance to forgive struggling borrowers’ mortgages as a tool to help put an end to the rising number of foreclosures impacting Americans.

I learned  early in my adult life that when cash was short, pay the bills that keep the lights on and a roof over my head and of course wheels to get to work, all else— pay them when you can and of course suffer the consequences.  Consumers have a completely different theory in today’s environment.  Since the banks are not so quick to boot them out of their home, the strategy on paying creditors has changed.  I never would have EVER guessed I would see this day.   Unsecured Debt gets priority?? WOW.  Check out this article, let me know what you think

The trend of U.S. credit cardholders putting credit card payments ahead of mortgage payments that began in early 2008 shows no sign of abating in the immediate future even as the economy gradually improves, a team of TransUnion LLC analysts contends.

Despite a recent uptick in credit card delinquency rates, the proportion of consumers falling behind on monthly credit card payments remains at near-record lows across the U.S., according to credit bureau data TransUnion analyzed.

TransUnion’s analysis stands in contrast to a recent report from Auriemma Consulting Group, which suggested consumers are starting to put a higher priority on making mortgage payments over credit card payments.

Auriemma conducted a survey in September of 509 U.S. credit cardholders. The findings suggested that 77% of consumers were giving mortgage payments the highest priority, followed by 52% who cited utility payments and 38% who cited credit cards. The study illuminated a reversal of consumer sentiment compared with a similar study the firm conducted in 2009.

TransUnion declined to comment on Auriemma’s study.

Citing its data from recent years, TransUnion says before 2008, consumers for decades tended to pay their mortgage first “because it was their greatest asset,” Steve Chaouki, group vice president for TransUnion’s financial services unit, tells PaymentsSource.

But the crash in home values that began in 2008, coupled with rising unemployment, caused consumers for the first time to begin putting a higher priority on making credit card payments over mortgages and auto loans.

“Consumers see that as their home values declined, credit cards represented liquidity, which is a more valuable commodity during an economic crisis,” Chaouki says.

The economy may be improving, but the underlying factors that put credit cards at the top of the bill-payment hierarchy persist, he says.

“We may see the payment hierarchy revert to the more- traditional setup where people pay their mortgages first when there is some real home equity to protect, or when credit becomes so freely available that it won’t be seen as a rare commodity to preserve,” Chaouki says.

It “will probably be a long time” before consumer credit lines, which many lenders cut during the crisis, become so abundant that consumers feel they can put credit card bills lower on the priority list, he adds.

Published by Credit and Collections Dec 7, 2011.

How Student Loans Impact Your Credit

If you’ve finished college within the last few years, chances are you’re paying off your student loans. What happens with your student loans now that they’ve entered repayment status will have a significant impact–positive or negative–on your credit history and credit score.

It’s payback time

When you left school, you enjoyed a grace period of six to nine months before you had to begin repaying your student loans. But they were there all along, sleeping like an 800-pound gorilla in the corner of the room. Once the grace period was over, the gorilla woke up. How is he now affecting your ability to get other credit?

One way to find out is to pull a copy of your credit report. There are three major credit reporting agencies, or credit bureaus–Experian, Equifax, and Trans Union–and you should get a copy of your credit report from each one. Keep in mind, though, that while institutions making student loans are required to report the date of disbursement, balance due, and current status of your loans to a credit bureau, they’re not currently required to report the information to all three, although many do.

If you’re repaying your student loans on time, then the gorilla is behaving nicely, and is actually helping you establish a good credit history. But if you’re seriously delinquent or in default on your loans, the gorilla will turn into King Kong, terrorizing the neighborhood and seriously undermining your efforts to get other credit.

What’s your credit score?

Your credit report contains information about any credit you have, including credit cards, car loans, and student loans. The credit bureau (or any prospective creditor) may use this information to generate a credit score, which statistically compares information about you to the credit performance of a base sample of consumers with similar profiles. The higher your credit score, the more likely you are to be a good credit risk, and the better your chances of obtaining credit at a favorable interest rate.

Many different factors are used to determine your credit score. Some of these factors carry more weight than others. Significant weight is given to factors describing:

• Your payment history, including whether you’ve paid your obligations on time, and how long any delinquencies have lasted
• Your outstanding debt, including the amounts you owe on your accounts, the different types of accounts you have (e.g., credit cards, installment loans), and how close your balances are to the account limits
• Your credit history, including how long you’ve had credit, how long specific accounts have been open, and how long it has been since you’ve used each account
• New credit, including how many inquires or applications for credit you’ve made, and how recently you’ve made them

Student loans and your credit score

Always make your student loan payments on time. Otherwise, your credit score will be negatively affected. To improve your credit score, it’s also important to make sure that any positive repayment history is correctly reported by all three credit bureaus, especially if your credit history is sparse. If you find that your student loans aren’t being reported correctly to all three major credit bureaus, ask your lender to do so.

But even when it’s there for all to see, a large student loan debt may impact a factor prospective creditors scrutinize closely: your debt-to-income ratio. A large student loan debt may especially hurt your chances of getting new credit if you’re in a low-paying job, and a prospective creditor feels your budget is stretched too thin to make room for the payments any new credit will require.

Moreover, if your principal balances haven’t changed much (and they don’t in the early years of loans with long repayment terms) or if they’re getting larger (because you’ve taken a forbearance on your student loans and the accruing interest is adding to your outstanding balance), it may look to a prospective lender like you’re not making much progress on paying down the debt you already have.

Getting the monkey off your back

Like many people, you may have put off buying a house or a car because you’re overburdened with student loan debt. So what can you do to improve your situation? Here are some suggestions to consider:

• Pay off your student loan debt as fast as possible. Doing so will reduce your debt-to-income ratio, even if your income doesn’t increase.
• If you’re struggling to repay your student loans and are considering asking for a forbearance, ask your lender instead to allow you to make interest-only payments. Your principal balance may not go down, but it won’t go up, either.
• Ask your lender about a graduated repayment option. In this arrangement, the term of your student loan remains the same, but your payments are smaller in the beginning years and larger in the later years. Lowering your payments in the early years may improve your debt-to-income ratio, and larger payments later may not adversely affect you if your income increases as well.
• If you’re really strapped, explore extended or income-sensitive repayment options. Extended repayment options extend the term you have to repay your loans. Over the longer term, you’ll pay a greater amount of interest, but your monthly payments will be smaller, thus improving your debt-to-income ratio. Income-sensitive plans tie your monthly payment to your level of income; the lower your income, the lower your payment. This also may improve your debt-to-income ratio.
• If you have several student loans, consider consolidating them through a student loan consolidation program. This won’t reduce your total debt, but a larger loan may offer a longer repayment term or a better interest rate. While you’ll pay more total interest over the course of a longer term, you’ll also lower your monthly payment, which in turn will lower your debt-to-income ratio.
• If you’re in default on your student loans, don’t ignore them–they aren’t going to go away. Student loans generally cannot be discharged even in bankruptcy. Ask your lender about loan rehabilitation programs; successful completion of such programs can remove default status notations on your credit reports.

Collecting is OK, but must be transparent, guidelines say

By Martin Merzer

They say only two things in life are certain — death and taxes. But here’s another: If someone dies with an unpaid balance on his or her credit card account, or while shouldering any other form of debt, a relative or friend is going to get a call or a letter from a debt collector.

Struggling to find a middle ground between the rights of creditors to collect debts and the grief and vulnerability of spouses and others mourning the deaths of loved ones, the Federal Trade Commission is issuing new guidelines intended to modify the behavior of debt collectors who contact relatives or friends of the recently deceased.

At the same time, however, the FTC’s guidelines widen the universe of people who could receive such calls or letters, making it all the more important that anyone on the receiving end of those communications understands his or her legal rights and obligations.

“There are debt collectors out there who follow the obituaries and they search to see if the person who died has a wife or a husband or kids and they immediately start hounding them,” said Jerome S. Lamet, a Chicago attorney who worked for the FTC and whose law firm has represented thousands of widows and widowers who felt victimized by what Lamet calls “terrorist collecting tactics.”

Representatives of the debt collection industry (they prefer the term “accounts receivable industry”) say that the vast majority of their agents behave honorably, treat debtors respectfully and work within a generally accepted and federally monitored framework of rules and regulations.

Rules vary by state
But before we dive more deeply into the give and take between debt collectors and consumers and their representatives, here are a few more aspects of the issue to keep firmly in mind:

First, everything you are about to read depends on the state in which you live and the state of your estate. Laws regarding these matters vary greatly from state to state and depend to some extent on how the deceased handled his or her end-of-life financial affairs.

• Generally speaking, family members (and, of course, friends) are not obligated to pay — out of their own pockets — the debts solely acquired by a deceased relative or friend.
• If, however, a family member or friend co-signed a credit card or loan application with the now-deceased person, that relative or friend likely is obligated to repay the debt.
• If the deceased left a will and the estate has gone to probate, debt collectors can attempt to satisfy their claims from the assets of that estate. “Most debts incurred in life do not simply vanish upon death … ,” the FTC wrote in its 33-page “Statement of Policy” issued on July 20, 2011. “Regardless of whether the decedent was current or delinquent on a bill at the time of death, creditors and collectors, for a period of time, generally are permitted under state law to seek to recover from the decedent’s estate.”
  This is one reason why many attorneys now recommend that the elderly and infirm do not leave behind wills that can go to probate. Instead, they often recommend the establishment of trusts and other legal entities other than wills that can control assets after a person dies. At the same time, some states have streamlined the probate procedure to the point where the vast majority of once-probated wills no longer take that route.
• Assets that are specifically bequeathed to individuals or that were owned jointly by the deceased and a spouse (or any other person) generally pass to that person outside of the estate and thus are usually beyond the reach of debt collectors.
• Adding to the potential complexity, in the 10 community property states of Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, assets accumulated during a marriage generally are considered joint property and also can’t be touched by creditors. “There is no single set of laws and procedures that governs the resolution of a decedent’s estate in all or even most states,” the FTC noted. “Indeed, even individual counties in some states have their own requirements.”

So, right about now, you are thinking: “If I ever find myself in this situation, if I ever get a call from a debt collector about someone else’s debt, I have to be careful and I have to get some help.” Right on both counts.

Relatives vulnerable
Consumer advocates and attorneys say that if a widow, widower, child, friend or anyone else close to the deceased should say absolutely nothing of consequence if they receive a call or letter from a debt collector about the decedent’s debts. Nothing. Nada. No matter how banal or benign the question might seem — because it could open the door to an ongoing relationship that eventually carries the survivor into inappropriately paying off someone else’s debt.

“Debt collectors are keenly aware that survivors are particularly vulnerable after the death of their loved one,” the AARP told federal regulators as the guidelines were being considered. “Collectors encourage decedent’s creditors to use the time of grieving to establish a customer relationship with the decedent’s survivors in order to recover on the debt from the estate.”

With those assertions in mind, the FTC reviewed thousands of taped phone calls between debt collectors and mourners — and it didn’t like a lot of what it heard.

“Some collectors attempt to recover by cold-calling relatives, asking whether they are the ‘person handling the final affairs’ of the decedent or are the decedent’s ‘personal representative,’” the FTC reported. “In some cases, collectors ask whether the family member with whom they are speaking has been opening the decedent’s mail or paid for the funeral. Some collectors treat an affirmative response to such questions as sufficient proof that these relatives are responsible for resolving the decedent’s estate.”

That’s often not the case at all. And then it gets worse, with the collectors asking a series of highly detailed questions about the deceased’s finances. And then… it gets much worse.

“Finally, in some cases, collectors ask relatives to make a ‘voluntary’ or ‘family’ payment,” the commission said. “For example, some collectors state or imply that the family has a moral obligation to pay the decedent’s debt, or that the decedent would have wanted the debt to be paid.”

Representatives of the debt collection industry have an entirely different view of how these contacts transpire.

“From our perspective, the most important element is clear and full disclosure without misrepresentation to those with whom a collector communicates,” Greg Hogenmiller, vice president and deputy general counsel of West Asset Management, a large, Omaha, Neb.-based debt collection/accounts receivable agency, told the FTC. “By its nature, this is a very sensitive form of debt collection because often the family members or friends of the decedent are still grieving at a time when they are also trying to sort out financial matters which they may or may not have previously had any involvement with.”

New FTC guidelines
It is this divide that the FTC sought to bridge with its new guidelines, which take effect on Aug. 29, 2011. Here are some highlights:

• Debt collectors may communicate with a deceased person’s spouse (or parent or guardian, if the deceased was a minor), the executor or administrator of the estate, or anyone else who is authorized to pay the debts from assets in the estate. Debt collectors also may communicate with family members and others to locate someone who is authorized to pay the deceased person’s debts from the estate. The commission said this was in the best interest of everyone involved because it could help prevent some estates from going through the lengthy probate process.
  “The commission has learned that, to recover on a decedent’s debts, some debt collectors contact the decedent’s relatives, although these relatives may have no authority to pay the debts from the decedent’s estate and no legal obligation to pay the debts from their own assets,” the regulators wrote.
  “The commission recognizes, however, that imposing unnecessary restrictions on a debt collector’s ability to collect a decedent’s debt from the person authorized to pay those debts may instead cause some debt collectors to seek to recover by invoking the probate process, imposing substantial costs on the estate and delaying the distribution of assets to heirs and beneficiaries.”
• At the same time, however, debt collectors may not mislead individuals into believing that they have the authority — or, worse, the obligation — to pay the decedent’s debts when they do not.
• “A consumer in this vulnerable condition may mistakenly identify himself as the person with whom the debt collector should be speaking,” FTC Commissioner Julie Brill said in concurring with the panel’s decision. “Worse still, he may end up feeling as if he has an obligation — legal, moral or otherwise — to pay the debt from personal funds, even though debt collectors cannot legally ask him to do so.”
  She said the policy is crafted to limit potential abuses. Debt collectors, for instance, must specifically mention that repayment must come from the deceased’s estate and that the person being contacted is not required to repay the debt out of his or her own pocket or with assets jointly held with the deceased.
• Debt collectors seeking to identify someone who is authorized to pay the deceased person’s debts from the estate may not use the word “debts.” Instead, they can say they “wish to discuss payment of the deceased person’s bills.
  “Such a reference balances the legitimate needs of the collector with the privacy interests of the decedent,” the FTC ruled.
• Debt collectors may not contact family members and others “at unusual or inconvenient times or places.” On the other hand, they do not have to observe any sort of “cooling-off period” in the immediate aftermath of a person’s death.

“The FTC recognizes that many family members may be vulnerable emotionally and psychologically in the aftermath of a relative’s death,” the commission concluded. “But the record does not indicate a significant incidence of calls by collectors immediately following the debtor’s death.”

Consumer advocates want more
Still, the guidelines don’t go nearly far enough for many consumer advocates and legal representatives.

Lamet, for instance, said the burden should fall on debt collectors when it comes to identifying who — if anyone — can be tagged with the deceased person’s debts. Court record and other documentation should be researched, he said. Cold calling by debt collectors should be ruled off limits.

“They should be required to find out whether or not this individual they’re calling is responsible for the debt before they call,” Lamet said. “If not, they should not be permitted to call these people. Allowing them to call and put the burden on the consumer to determine whether they owe that debt is very, very  weak.”

He and other consumer advocates advise people receiving such calls or letters to, once again, say nothing of substance during the initial contact. Then, they should seek assistance from a local credit counselor or attorney, or at least do their own research by reading carefully through the FTC’s new guidelines or its consumer advisory.

Leading representatives of the collection industry, however, said the new guidelines seemed fair and balanced to them.

David Cherner, corporate counsel at ACA International, an association that represents 5,000 debt collection companies and other entities worldwide, said it “strongly supports the FTC’s policy statement to bring clarity to the complexities involved when collecting on a decedent’s debt.”

“The FTC’s policy statement provides essential clarity, which is helpful for debt collectors to continue engaging in decedent collection while being mindful and noting the appropriate precautions debt collectors must consider when communicating with consumers regarding a very sensitive matter,” he said.

Regulators approve
The North American Collection Agency Regulatory Association, which represents collection agency regulators in 25 states and Canada, endorsed the FTC’s action.

“We are in favor of this policy statement and believe that it certainly provides clear guidelines in the collection of these sensitive financial obligations,” said Kelly Mack, the group’s president and a lead financial examiner for Maryland’s commissioner of financial regulation.

Mack said the group believes the moves “are tailored to effectively collect these type of debts and at same time protect the grieving parties from feeling obligated to personally settle the financial affairs of their deceased loved ones.”

The group, however, urged regulators at all levels, to remain diligent, given the past performance of some in the debt collection industry.

“We are hopeful that the FTC and state regulators will aggressively police the new standards to ensure that collection letters and phone calls do not have the effect of pressuring relatives of the decedent to personally pay debts for which they are not legally liable,” Mack said.

“I believe the most important single thing, beyond discipline and creativity is daring to dare.”- Maya Angelou

Out of touch or out of their mind? Maybe both!

In a recent survey conducted by a BIG benefits management company (a management and human resource consulting firm), they asked 365 CEOs and sales management executives, “What are the three key factors that separate high performing sales professionals from moderate to low performing sales professionals?”

Both CEOs and C-level sales executives (all people who don’t sell, but rely on their salespeople to produce sales so that they can get paid), ranked “self discipline/motivation” as the most important.

Next in line were, “customer knowledge,” “innate talent/personality,” and “product knowledge,” and further down the list were “experience” and “teamwork skills.”

Totally bogus.

These are qualities of corporate greed, not value, service, or help – the three things that customers require to give business and maintain loyalty.

MAJOR DUH: When “survey” companies ask questions of people, why don’t they ask the people actually doing the work?

I’m a writer, but I’m also a salesman. I make sales and sales calls every day. If you’re interested in the most important factors of a high performing salesperson, let me give you a realistic list of success characteristics.

1. Perpetual, consistent, positive attitude and enthusiasm. This is the first rule of facing the customer, facing the obstacles, facing the competition, facing the economy, and facing yourself.

2. Quadruple self-belief. Unwavering belief in your company; unwavering belief in your product; AND unwavering belief in yourself are the first three rules. But fourth is the most critical of the self-beliefs. You MUST believe that the customer is better off having purchased from you.

3. Use of creativity. Creativity to present ideas in favor of the customer, and creativity to differentiate you from the competition.

4. Ability to give and prove value. To prove the value of your product or service, and your ability to give value beyond the sale to the PROSPECT so you can earn the order, the reorder, and the loyalty.

5. Ability to promote and position. Personal use of the Internet to blog, ezine, utilize social media, and achieve Google top ranking, so your customers and prospects will perceive you as a value provider and a leader in your field.

If you’re thinking that our economic crisis was in some way the fault of homeowners who couldn’t afford their mortgages, please consider the following:

At the end of 2007, there were roughly $1.4 trillion in sub-prime mortgages in this country.

If “irresponsible sub-prime borrowers,” caused the meltdown, then $1.4 trillion would have solved the problem in its entirety, right?  Because that’s all the sub-prime loans there were.

But, between the Federal Reserve, the FDIC and the Treasury over $13 trillion has been pumped into financial institutions to fix the “housing correction,” which is what Hank Paulson was still calling our economic collapse as of November of 2008.

At the end of 2008, there were $11.9 trillion worth of mortgages in this country.  So, with $13 trillion, the government could have paid off every single one… and still had a little over a trillion dollars left over.

But there’s a lot more to the economic problem than that, explains Nomi Prins, my new favorite financial uber-genius and author of “It takes a Pillage.” Wall Street had been playing the leverage game… somewhat like they did in the 1920s, I suppose… but on mega-steroids.  Leverage means borrowing on assets, and Wall Street banks were leveraged by 30:1, commercial banks by 10:1, not including their “off-the-balance-sheet” holdings, which could make their leverage ratio significantly higher in many cases.

So… in “Pillage,” Nomi Prins explains in terms anyone can understand that factoring in the leverage at 11:1, we’re looking at a $140 TRILLION economic problem… yes, you read that correctly… that’s trillion, with a ‘T’.  Our Wall Street bankers, through the abuse of the securitization process and excessive amounts of leverage, created a potential tab of $140 TRILLION for the people of this country to pick up.

Securitization is the process of packaging loans into securities that are then be sold to investors, called Asset Backed Securities (or ABS).  Inside a given ABS, you might find 10% real loans and 90% bonds backed by those real loans.  Or there could be only 5% real loans.  The mortgage payments we all make are used to make payments that flow through the securities and to the investors who then invest by buying pieces of the ABSs.

“It takes a Pillage” is a book that’s absolutely jam packed with “Aha!” and “OMG!” moments, but one shines above the rest… What caused the financial crisis were the securities, or the “bonds”… not the loans.

We’re talking about a system that took on $140 trillion in debt on the backs of just $1.4 trillion in real loans.  And it may be much more than $140 trillion, we don’t really know because we’ve allowed the market to remain unregulated.  The $1.4 trillion is based on leverage at 11:1.  It could very well be some multiple of that amount.

Issuers of ABSs, who were Wall Street’s investment banks earned about $300 billion for packaging and selling these “assets,” packaging the CDOs we’ve all heard about paid the best.  Who bought ABSs?  European and the global banks, insurance companies, and pension plans bought a whole lot of them.  And they bought them with borrowed money.

They bought them because Wall Street told them they were safe… triple A rated… and even better they could be insured with Credit Default Swaps, too!  What was not to love?

Hundreds of trillions in “structured assets”, ABSs, MBSs, CDOs, CDOs Squared, and of course synthetic CDOs, which are entirely, made up of credit default swaps, all deriving their value based on $1.4 trillion in mortgages.  All of those structured investments, once demand for them abruptly dried up, are what we came to know as “TOXIC ASSETS.”

Prins makes it very clear that toxic assets are not the same as defaulted sub-prime loans.  The fact is, Nomi says, that every single sub-prime loan in the country could have defaulted and all of the homes attached to those loans devalued to zero… neither of which happened… and the banks in this country would not have become insolvent… not even close.

The toxic assets lost their value starting in the summer of 2007, not because sub-prime loans defaulted, but because no one wanted to buy them anymore.  After Standard & Poors and Moody’s lowered their ratings on just 1% of the MBSs outstanding on July 10, 2007, investors no longer trusted the triple A ratings.  If some bonds were improperly rated, the thinking went, what about all the others?

I’ve read just about every book on the meltdown that’s been published in the last two years.  From “Too Big to Fail,” to more recently, “Crash of the Titans,” which is about Bank of America’s acquisition of Merrill Lynch, and “It takes a Pillage” filled in so many blanks for me I couldn’t possibly count them all.  Nomi is a very down to earth person too, and it makes reading her easy like Sunday morning.  She’s snarky at certain moments, but she delivers it straight most of the time so you won’t get distracted.

I read her book and was on the phone the following morning with my friend in New York, Danny Schechter, who produced the movie, “Plunder – The Crime of Our Time,” which is all about the housing meltdown and foreclosure crisis and if you haven’t see it yet, you really should order a copy on Amazon right away.  Nomi appeared in Danny’s film a, so I knew he could put me in touch with her, and she responded to my email right away.  (She’s even agreed to an interview, so look for a podcast coming soon, I hope.)

Nomi is smart… I mean scary smart.  Like, I’ve always been considered smart too… near the top of my various classes, 1380 SAT scores about a hundred years ago, if that means anything, but Nomi is so far off the charts that I can’t even believe it.  I don’t remember anyone like her in college or graduate school.  Talking to her is like talking to a walking encyclopedia of the financial history of the United States… but one that speaks English like the rest of us.

By the summer of 2006, the housing bubble had popped.  Greenspan had raised interest rates 17 times in a row by then.  But, starting on that July day during the summer of 2007, before most people had any idea what was happening, the bond/credit markets froze solid as money stopped moving… banks started hoarding cash and soon no one would be able to get a mortgage or refinance one… and housing prices started to fall fast.

After that, anyone that had bought a home during the preceding years found himself or herself increasingly underwater.  One couple I know, with an 850 credit score by the way, lost a home to foreclosure and filed for bankruptcy.  He was a very successful dentist and she a hospital administrator.  Their crime?  They got caught buying a home… and selling one at the worst moment in US history.

So, our government pumped $13 trillion into banks, financial institutions and others in this country since the fall of 2008.  We allowed just about any business that wanted to become a “Bank Holding Company,” so they could qualify for the federal bailout programs.  (As an example, did you know that American Express Travel Services became a BHC in order to receive $4 billion in taxpayer dollars?  Why? What do they do?  Arrange vacations for rich people?  Were “they too big to fail,” too?  Nomi covers it in “Pillage.”)

And today, the only mortgage lending in this country comes from the federal government… Fannie Mae, Freddie Mac and the FHA.  So, we’ve already nationalized mortgage lending in this country.  We had no choice but to do that because if we didn’t, there would be no mortgage lending in this country.  Citibank and Bank of America have been nationalized too… I know we don’t call them “nationalized,” but they ARE both nationalized.

(Citibank, for example, has been given over $400 billion in government loans and loan guarantees.  BofA has been received over $200 billion. We still guarantee Goldman Sachs bonds… meaning we are co-signing for their debt.  Want to see the numbers in detail, visit the “Reports” tab on NomiPrins.com… you won’t believe it.)

General Motors had to come to congress for a loan at the end of 2008… why?  Well, for one thing, in 2008, they missed their forecasts by 2.4 million cars… we couldn’t finance one so we couldn’t buy one.  And the bond market was broken, so they couldn’t issue bonds as they normal would.  We lost tens of thousands of jobs when they filed bankruptcy.

Unemployment started rising as we stopped spending.  And we entered a deflationary spiral… the same one we’re in today.  There’s no double dip, it’s the same “dip.  The reason they can say that the recession ended was because of the trillions we were pumping into the system.  Among other programs, the fed bought $1.5 trillion in mortgage-backed securities between 2009 and 2010, but that’s over now, and the downturn is back in the game.

We’re just about at the end of QE2 now, and we don’t have any more stimulus money to artificially stimulate our economic situation… so things are already returning to their downward slide.  Home values nationally have fallen 57 months in a row… and they’ve fallen faster and further than during the Great Depression.

The sooner we face the reality of the situation, the sooner we can start to rebuild our economy.  All we’ve done so far is pump money into insolvent financial institutions, while we’ve let the American middle class sink into an abyss from which we will not recover in my lifetime… and I’m turning 50 on Friday of this week.

You see… all that government spending, as we like to call it… is really US… we ARE the government… it’s OUR money the government is spending.  All those trillions are coming out of OUR pockets, and the pockets of our children and their children.  And a few hundred billion has gone into the pockets of our bankers in the form of bonuses… and no one even seems to care.

And still, all that many people want to talk about is how some homeowner must have been living beyond their means and deserves to lose their home.  Don’t bail out irresponsible sub-prime homeowners, right?

According to a study published by the Washington Post, most Americans do not understand what a credit score means or how their score will affect their ability to get a mortgage, car loan, or a credit card. This comes from a survey of 1,000 adult Americans commissioned by the nonprofit Consumer Federation of America and the lender Washington Mutual Inc. Also revealed was that the average American’s knowledge of credit scores has not improved since the last time the survey was conducted, two years ago. “Even those who have obtained their scores have serious knowledge deficiencies,” said Stephen Brobeck, the federation’s executive director.

• The percentage of those who know the purpose of credit scores, to show their risk of not repaying a loan, has risen from 27 percent to 29 percent since 2005.
• The percentages of respondents who incorrectly think that income, age and education influence their scores increased.
• In addition, many said they think their state of residence and ethnicity affect their scores. They do not. Their payment history and credit lines do.
• Perhaps most disturbing to those who commissioned the survey: Only 24 percent know that the minimum score typically needed to qualify for a low-cost mortgage is 700. “A credit score cannot be meaningful if you don’t know that information,” Brobeck said.
• Fair Isaac Corp.’s FICO credit score, the nation’s most widely used formula, ranges from 300 to 850.
• Borrowers with scores below 600 are typically charged high “subprime” loan rates. Those with scores exceeding 760 get the lowest rates. And each consumer has more than one score. Each of the three major credit bureaus, Equifax, TransUnion and Experian, generates a score

Can a quick swipe satisfy feelings of inadequacy?

By Kelly Dilworth

Trying to make it in the real world — and build a solid financial life when you’re just starting out — can often feel like a losing battle. This is especially true these days with high food and gas prices, sharply rising college tuition and health care costs and a steep unemployment rate. However, research shows that for some 20-somethings, it may just take a quick swipe of a credit card to feel like they’ve got everything under control.

A study from Ohio State, published in May 2011 in the Journal of Social Science Research, found that when young adults from poor and middle-class backgrounds used student loans and credit cards to finance their uncertain lifestyles, they felt a temporary but powerful boost in self-esteem and in feelings of mastery over their environment.

“Young debtors experience debt as empowering,” wrote the sociologists who researched and wrote the study — lead author Rachel E. Dwyer and Randy Hodson of Ohio State, and Laura McCloud of Pacific Lutheran University. When young people in their early to mid-20s take advantage of their access to credit, they feel that they have “prepared themselves to meet the future — at least until the full requirements of repayment ensue.”

The study’s conclusions were derived in part from interviews with 3,079 young adults ages 18-34 that were conducted on behalf of the U.S. Bureau of Labor Statistics for a biannual survey on American youth. The samples for the study were collected before 2005 — well before the impact of the recession may have caused young people to rethink the impact of their debt. However, the researchers say that the findings are a cautionary tale for young adults who use debt to purchase a lifestyle they couldn’t otherwise afford.

The road to debt When older adults think about paying down large amounts of debt, they often imagine feeling weak, powerless and out of control. However, some 20-somethings say that it’s liberating to be able to use debt to achieve a lifestyle they always wanted — and the interest that they pay later is worth the extra cost.

Take, for example, Meredith Blount, a 27-year-old lawyer in New York City. Blount grew up poor in a small town in Central Florida and knew from an early age that the only way to afford the education and lifestyle that she dreamed of was to purchase it with credit. “I had to come to terms with the fact that I had to take on a lot of debt to support myself in the way I want to and give back the way I want to,” says Blount.

Blount took on $410,000 in student loans in order to finance an undergraduate degree, a master’s degree in finance and a law degree from a prestigious university in Tennessee. “You have to get that education in order to be accepted into the real world,” says Blount. “At least in the real world I wanted to be in.”

Blount says that her access to credit also allowed her to accumulate invaluable experiences that helped broaden her perspective. For example, after college, Blount racked up about $5,600 in credit card charges that she mostly used to travel to India, Costa Rica, Spain and Peru. The experiences were worth the charges to her credit card, she says, and her income as a lawyer allows her to keep up with the monthly payments.

Blount says that she doesn’t regret most of her debt. However, experts worry that this kind of borrow-now, pay-later attitude can lead to frightening consequences for those who find themselves saddled with ballooning interest payments. This is especially true for those who never break the habit of using credit to fund their preferred lifestyle.

When credit becomes addictive
The researchers at Ohio State believe that young adults tend to use debt not just to exercise control over their circumstances, but also to increase their status in the eyes of others and to boost their self-worth.

For example, the researchers say, a young adult who is just starting out may use a credit card to purchase appropriate clothes for a job interview or to purchase entry into a fraternity or sorority that provides valuable social connections that can be used to get ahead. It isn’t until they reach their later 20s that they begin to realize the full impact of that debt.

Jason Eichacker, 31, of San Jose, Calif., for example, used debt throughout his 20s to help finance expenses that helped move him closer to his goals. “When I needed professional looking clothes or textbooks, I just put it on my card,” says Eichacker. To justify it, he told himself, “‘You know what, I’m going to make good money. I’ll be able to pay it off pretty quick.’”

Unfortunately, Eichacker’s habit of using credit to finance his aspirational lifestyle later spiraled out of control when he opened his own business and used business and personal credit cards to purchase what he needed. “When the business foundered, I had to declare bankruptcy,” says Eichacker. He now receives collection calls almost daily and his personal relationships have suffered as a result of his wrecked credit history.

Eichacker admits that self-esteem issues and an early concern with status and control over reaching his goals were at the root of his behavior. “It gets down to the picture in my mind of how I was supposed to look like,” says Eichacker. “I was more concerned with that than I was about how my credit would be down the line.”

Power and status matter, say researchers
Young adults’ desire to look good in the eyes of others and to feel more powerful than they are could also be a key reason why they are so willing to take on heavy debt loads, say experts.

“Desire to be as high in the hierarchy as possible creates a powerful psychological state,” says Adam Galinsky, a professor at the Kellogg School of Management at Northwestern University. And when we’re feeling like we’re low on the status totem pole, we find ways to compensate, including making status-based purchases that make us feel better and more in control.

Derek Rucker, also of the Kellogg School of Management, agrees. Rucker and Galinsky co-wrote a paper in 2008 that found that when consumers are feeling low on power, they compensate by spending more on high-status items.

“Buying things is a way to alleviate [a feeling of powerlessness]” says Rucker. “It might be only temporary, and so I continue to buy and that’s how I accrue debt. When consumers feel powerless, they spend in ways that help them accumulate power or at least the psychological feeling of power.”

Those findings correlate with the Ohio State study, which found that young adults who felt the most empowered by their ability to take on debt in order to buy experiences or things were from a low-income or middle-class background. Those from an upper income bracket, in turn, appeared to get no psychological benefit from their debt.

“The wealthiest young people have the most resources and options available to them, so debt is not an issue for them,” Ohio State’s Dwyer explains in a press release. “The groups that most need the debt — the middle and lower classes — get the most benefits to their self-concept, but may also face the greatest difficulties in paying off what they owe.”

Mixed messages on credit and debt
Many young people have also learned that they need credit — and a solid credit history — in order to live a normal, middle-class lifestyle. The problem is they sometimes conflate their ability to access credit and build a good credit score with their value as a person, say experts. And this, too, can lead to a slippery slope toward excess debt.

Michelle Barnhart of Oregon State University co-wrote a study published online in April that found a startling correlation between bank loans and self-esteem. Researchers interviewed 27 white, middle-class consumers in 2006, well before the recession, and found that many of the young people they spoke with measured their self-worth by the types of loans that they were approved for.

“A couple said things like, ‘Well, you know, I went to get a car and the car dealer ran my credit score and my income, and they said that I was good enough for the car I wanted. By implication, they were saying they deemed me good enough to get that car,’” recounts Barnhart. “That really intrigued us. It makes you feel really good about yourself when your creditors are willing to loan you this money.”

At the same time, says Barnhart, researchers found that some of the young adults in their study viewed their credit scores as an essential yardstick to measure how well they were living up to expectations. “The credit score indicates something to them about their value as a person,” says Barnhart. “The ones who had bad credit issues recounted those times as feeling really bad about themselves.” Then, when they managed to rebuild their scores, they felt good about themselves again. “Rebuilding your credit score is almost rebuilding you,” notes Barnhart.

But if you find yourself already deep in debt, Sullivan adds, “stop digging. Whenever you find that your debt load is too high, whenever you look at it and see what it’s costing you and it becomes alarming because you know it’s more than you can handle, stop digging. Stop borrowing.”