I may have lost faith in Wall St., but today I regained faith in Congress.  The House shot down the $700 billion bail out… and I could not be happier.  And you wanna know why… Ok, but first let me lay the groundwork just in case

The gist of the bailout plan

HR 3997 would have allowed the Secretary of the Treasury to establish the Troubled Asset Relief Program.  This program would have been allowed “to purchase and to make and fund commitments to purchase, troubled assets (shaky mortgages and mortgage-backed securities) from any financial institution.”

My president, our president decided that it would be a good idea to use $700 billion of our tax dollar to save the finance industry.  He wanted to buy shaky mortgages and mortgaged-backed securities.  We all know what a mortgage is, but…

What is a mortgaged-based security?

It is sort of like a bond… an IOU.  Potential homeowners go to banks to apply for a home loan.  The bank issues the mortgages.  And then, the bank pools the loans into neat little packages and sell them on the market.  The people who buy these neat little packages receive interest and principle payments every month whenever the homeowners pay their mortgage.  In essence the investors are lending the money to homeowners and expected to receive payments every month.  The bank’s role in this is as the middleman.  For its services of connecting the buyer and lender, the bank receives a service commission.

Plan English…

Ok I got 10 friends who need a hundred dollars each.  They all ask me if I can loan them the money.  I shell out the $1,000 at 15% and get them to sign an IOU.  Then I turn to my friend Joe Blow and I say look Joe, buy these IOUs from me for $1,000. And when my 10 friends pay the bill, I’ll send you all the principal ($1,000) and interest ($150).  All I want is a small services fee of $2.

So I make $2 and Joe gets $148.  However, Joe now assumes all the risk.  If any of the friends don’t pay the bill, it is Joe who will be shafted, not me.

The problem with mortgage-backed securities

Generally, there is no problem.  Most times mortgage-backed securities are a safe bet.  Yeah, there is some risk involved, but usually not much.  The way it works is that the IOU is secured by an asset… the house.  The house is appraised by the bank, the applicant has adequate income to repay the loan, and the bank verified the homeowner’s financial credibility.

But… What happens if the house is over-valued, if the applicant overstates his ability to repay the loan, and if the banks did not adequately qualify the mortgages? 

So here enters the problem…

Well what happens is… that those mortgage-backed securities are worthless and investors will lose a lot of money.

Lately, investors have been taking a lot of losses on these mortgage-backed loans because the mortgage pools are filled with subprime products, foreclosed properties, soon to be foreclose properties… just a mess of worthless assets.  (I’m not really sure if “assets” is the right word to use here because asset implies value.)

Who are these investors?

Mortgage-backed securities are big business.  And because of the perceived low risk, many entities buy them…banks, hedge funds, pension funds, mutual funds.

Alright now back to why I am glad that this bailout was voted down. 

The bailout would have rewarded corporation for bad behavior

The bailout would have alleviated the mortgage risk exposure of financial institutions (and only financial institutions).  Aren’t these the people started this mess in the first place?  Financial institutions were being careless and greedy.  They knowingly exposed themselves to subprime lenders in order to increase short term profits.  Not only did these financial institutions give money to those with questionable financial credibility, but they also engaged in other greedy and deceitful behaviors.  They overvalued houses so that they can issue first and second mortgages.  They came up with all these colorful ways to qualify borrowers… balloons, no interest mortgages, one year ARMs, etc. They made stupid choices in order to fatten their pockets, but it backfired. 

I hate to get on the Harper story again, but just think about this… JP Morgan Chase loaned a family a half a million dollars.  The borrowers… a house wife and a home security alarm installer (not wealthy people).  The loan was secured with a house that cost almost a million dollars to build (the house was a free gift from Extreme Makeover: Home Edition).  At one point the family was trying to sell the house for $950,000.  It did not sell.  Why… because regardless of how much the house cost to build… a house (or anything else for that matter) is only worth as much as someone is willing to pay for it. 

The house is Lake City, GA.  The median income in Lake City $38,000, the median house value, $125,000… both less than the medians for the state of Georgia. 

Now granted I don’t know much about the neighborhoods in Lakeland, GA… but the Harper’s old house was ummm… a dump (I’m not trying to be ugly, but it was).  The dump was torn down and replace with a mansion.  Great! 

But if the Harper’s old house was a dump… then chances are that the houses around it are dumps too.  What sane person with a million dollars or even a half a million dollars would buy a mansion that was surrounded by dumps? I know if I had that kind of money to spend on a house, I would not be looking to buy a mansion that sits in the middle of dumps.  I would want a mansion that is surrounded by other mansion. 

No matter now much it costs to build, nobody is going to buy that house for so much money.  The house is not worth a half a million, it is only worth what someone is willing to sell it for.  Location, Location, Location - that is what the realtor says.  I am no realtor and I understand that.  So why would JP Morgan Chase value that house at a half a million dollars plus. 

Anyway, the family could not repay the loan and it went into foreclosure.  The house went up for auction.  I am not sure what it sold for, or if it even sold at all… but either way, that was a horrible business decision on JP Morgan Chase’s part. 

Taxpayers should not have to foot the bill for the bad decisions of borrowers and lenders.

The federal government has never come to my rescue when I did something stupid.  So why should they help stupid… (greedy) banks? And anyway a bailout out does not solve the problem.  It is just a band aid.  Bailing out banks just frees them to go out and make poor bad decisions.  So way to go House!  I think you all really voted for the people on this one.

Dear Exxon,

Last year you made $40.6 billion in profit. I made $24,600. (Mine wasn’t all profit though.) Clearly, we move in different circles. Your ways are not my ways. Your kung fu is greater than my kung fu. Your gross receipts for 2007 alone topped out at over $404 billion, which is bigger than the gross domestic product of no fewer than 120 nations.

Wow.

My writing profits for 2007 totaled about $78, (which is what the US is currently shooting for in terms of gross domestic product. We’ll get there, I’ve no doubt.)

I have a question to ask you, if you have just a minute.

I am doing much better this year, and I see that so are you, with over $10 billion in profits in the first 2008 quarter alone, and the price of gasoline now pushing $4.50 or higher in lots of parts of the US, and diesel even higher, so high, truck drivers in Spain are acting up. Good for you. That’s what capitalism is all about, right? Profit, profit, profit. And you are leading the pack, holding the torch as it were (don’t hold it too close to all that oil though…you know what happened at that BP refinery). I commend you for your initiative and success.

Here’s my question:

Why did you find it necessary to fight the $2.5 billion in punitive damages for the 1989 Exxon Valdez spill, a spill that released 10.8 million gallons of crude oil into Alaska’s Prudhoe Bay and covered 11,000 square miles of ocean, a spill you admit was your fault and no one else’s. I mean, you have the money, right? We’re talking 1989 here. Since 1989, you’ve made so much profit that all the zeros won’t even fit into this blog, so let’s not even go there.

Perhaps you have forgotten that the Exxon Valdez oil spill instantly killed somewhere between 250 and 500 thousand sea birds, 250 bald eagles (an American icon which at that time I believe was actually an endangered species to boot), and 22 Orca whales, not to mention sea creatures of all kinds too numerous to list much less count.

Thousands of volunteers saved you most of the painful and hopeless work of trying to save these rare, suffering animals so you could instead take way too long finding a subcontractor to spray deadly chemical dispersants, surfactants, and solvents (which, damn the bad luck, didn’t work very well) all over the already poisoned Bay. So it’s not like you didn’t try at all, and to be perfectly fair, cleaning up oily messes is not really your thing. You are in the business of finding and selling oily messes.

Still, what did it cost you to fight this thing legally for 19 years running?

Corporate lawyers don’t work cheap. Even the ambulance chasers around here get $100 an hour, so I know you had to spend far more than the penalty just arguing the penalty in court after court after court.

What’s up with that?

Were you afraid that if you were held to some basic, minimal standard of corporate responsibility it would end up cutting into your impressive profits? If so, I wish you’d have called me first. You don’t have sic a squad of corporate attorneys on people and birds and fish already drenched in oil to preserve your right to be irresponsible. All you really have to do is get one of your pals elected President (oh, I forgot, you did that already), and then hire a big, glossy advertising firm to make beautiful commercials with lots of politically correct ‘green’ imagery and multinational persons wandering around on sand dunes and seashores and stuff like that, all to show how sensitive and environmental you are. That’s what BP and Dow Chemical do, and it works great.

People will believe anything if it’s on TV.

I know you won’t answer my letter. I know you are busy. It’s just that, for the life of me, I can’t understand why you would spend more than the original $2.5 billion, just to get it reduced to $500 million 19 years later. Maybe you aren’t aware of this, but right now, people in this country don’t like you very much. People think you are greedy and uncaring and tyrannical. People think you are gouging them and doing whatever you please and damn the consequences. When you don’t bother to even respond to those kinds of feelings, we start to feel like you don’t really care about us very much.

At the beginning of 2007 NOAA determined that you still have 26,000 gallons of crude oil poisoning the sandy soil of Pruhoe Bay Alaska. I just want to ask you this one favor:

Please don’t charge them for that oil.

Thanks for listening. Your little capitalist fan,

Pam, PFA

PFA is happily participating in the Carnival of Financial Goals hosted by Cash Money Life, a sort of internet-wide blogger party taking on a variety of themes revolving around various topics related to goal setting. This month’s topic is Declare Your Financial Independence.

But how do you declare your financial independence when you are afraid of losing your job, prices on everything are skyrocketing, and you can’t even afford to drive your SUV anywhere anymore?

Actually, I’ve been thinking lately that the tough economic times we are going through right now do have another side, a silver lining of sorts. That silver lining is the opportunity to make yourself over completely. Part of that make-over is out of necessity. You can’t afford to drive so you walk now and take the bus. You can’t afford your favorite supermarket anymore so now you shop at Sam’s Club and the Dollar Store and Aldi’s. The mall? Forget it. When you need new pants it’s Goodwill or K-Mart for you.

Why not take it to the next level?

Ask yourself, “If I could do anything I wanted, what would it be?” Once you have the answer to that question, ask yourself if you might be able to actually do that thing if you were free of the debt and constant purchasing your old, pre-recession lifestyle involved. Sometimes it takes a crisis to force us to look at ourselves and our world a different way.

It is possible to pay off debt, but you have to be willing to cut up your credit cards and never use them first. If you can make yourself do that, you’re halfway there. Once they are all cut up, start paying as much as you can on the one with the highest interest rate, and pay the minimum on each of the others until that first one is paid off. So say the minimum on your highest rate card is $90 and you can pay $200. You pay $200 until your balance is paid off, then you close that card and apply that same $200 on top of the minimum payment on whatever card has the second highest interest rate. You do that until they are all gone.

You can find a great list of calculators, including a calculator that shows what it will take to pay off your credit card, at Bankrate.com. Calculators are a great tool for helping you to see what is possible, and also what the true cost of credit is. For example if you carry a $15,000 credit card balance at 21% (which, sad to say, is about average in the US), and you make the minimum payment each month of $375, you will pay $34,360.87 in interest on that original $15,000 in purchases, and it will only take you 554 months (or, a little over 46 years) to pay it off. Ouch.

Now, what if throw just $15 extra a month at that debt? Couldn’t help much, right? Wrong! If you pay $390 on that same card, just $15 extra each month, you will pay the card off in 65 months, or about five and a half years, and pay $10,134.33 in interest. That’s a savings of over 40 years and over $24,000!

What else could you lose right now that would open up a world of choices? What if you didn’t have a $2000 mortgage payment? If two of you are living in a 3000 square foot newer home in the suburbs, and if you don’t plan on children soon or have already had your children, you might want to dump the mini-mansion (if you can). A modest ranch in a decent city neighborhood, or an older home with all the charm and fireplaces, will save you money on transportation and save you money on your mortgage.

If you live in the midwest, a nice older home closer in can be had for around 100K, give or take ten thousand dollars; even less if it’s a repo and you can negotiate a short sale. Even with no down payment, that’s only about $730 a month at 7% interest. If you can put $20K down on it, you’re looking at a house payment of $531!

What kind of life could you chose to lead if you had no unsecured debt and a house payment if $500 or so?

That may not be what you want at all. Maybe financial independence to you means lots of money coming in, not small amounts going out. If that’s the case, this is your moment.

When Billy Vasquez, the blogger who writes and maintains The 99 Cent Chef first started his blog on cooking with dollar store ingredients, he was getting five or six hits a day. Now he’s averaging 5 or 6 thousand hits a day, and like they say, the hits just keep right on comin’. In times of crisis, the person with the bright idea gets the cash, and it doesn’t have to be a bright idea that costs a lot of money to start up.

I’ll be honest with you. I took some of my own advice last year in late October, early November. I wanted my unsecured debt to be gone, I wanted to do something I cared about more than my depressing day job. Specifically, I wanted to write for a living, something I equated to wanting to be a Ballerina or Space Barbie. That was my general sense of how possible my goals were.

As of today, I’ve paid off my car and two credit cards, and have two cards left to pay off. In March, I cut back my day job to 20 hours instead of 40, because I was so deluged with writing work I could not keep up, and what’s more, it paid better. Last September, if someone had told me that was even possible, let alone that it would actually happen, I’d have laughed myself silly. Yeah right! And yet, here I am. Currently I’m looking for a way to ditch the day job altogether (hint: health insurance is the stickler), because I have a couple of book ideas I’m pitching and my freelance work continues to grow.

None of this would have happened for me though if I hadn’t taken some time to 1) figure out what it was I really wanted in my life (I’m 55–midlife crisis time, dontchaknow), and 2) DECLARE MY FINANCIAL INDEPENDENCE, which is known less dramatically as goal setting.

Knowing what you want isn’t half the battle: It’s 99% of the battle.

What do you really want? It might just be that the world is waiting to give it to you.

Yesterday, the FBI arrested two mid-level Bear Stearns investment bankers for intentionally over-valuing mortgage-backed securities even while their real value was plummeting. One of the bankers, Ralph Cioffi, valued one of the funds as having lost 6.5% in April, even while colleagues were valuing the same fund as losing 18.97% in that single month.

Now, of course, from all the major investment banks and global banks with investment arms comes the chorus of promises to self-monitor. (I’ve seen this play before. Have you?) Credit Suisse, Merrill Lynch, Morgan Stanley, and Citigroup are all rushing into the spotlight to assure the press and the public that they are cracking down on this sort of thing. Hard.

Sure they are. NOW they are. But how long will that last?

I predict it will last exactly as long as lower-level bankers are still being arrested and the whole thing is still in front of the press. Excuse my cynicism, but bankers today are under unbelievable pressure to make their employers money whatever the cost to their own integrity and safety. I’m not saying this excuses Bear Stearns Ralph Cioffi and Matthew Tannin, but I am saying that it is disingenuous in the extreme for corporate management to be out in front of cameras behaving like it is all very shocking and they certainly will not be tolerating any more of this, no sir. Juz terribul. Oh my!

In the past year alone several prominent CEOs retired early with huge golden parachutes after losing the financial institutions that employed them billions of dollars. They are not in jail. They have more money than God, and this as a reward for destroying the corporations that employed them through raw greed, financial mismanagement, bad investment decisions, and more than anything else, slippery underwriting practices and sleazy sub-prime mortgage deals. I guess if you are a CEO it’s OK. If you are a midlevel banker at an investment firm, you’re goin’ down, buddy!

It’s pretty hard to feel sorry for investment bankers. (Ever see the film ‘Boiler Room?’) On a personal ‘yuck’ chart they rank somewhere between insurance and car salespersons and attorneys; they move a little higher or lower depending on the firm. Still, the whole spectacle yesterday reminded me somewhat of the Abu Gharib scandal, in which a few low-level soldiers were hauled in front of cameras, charged, upbraided, and publicly shamed for actions that clearly originated in the offices of Donald Rumsfeld and Dick Cheney.

The soldiers deserved the court marshals. Where are the trials for Cheney and Rumsfeld?

Ever since Reagan, we have been singing the praises of deregulation and laissez-faire capitalism, and this is what it has brought us to. Now, all the weasels are scrambling for nice deep holes to hide in before any camera lights are shined in their direction.

When will we ask the bigger questions?

When will we say, you know what? This corporate model is not working very well. The financial industry is in a mess that verges on total collapse. The entire US has been gravely affected by it, and month after month it just gets worse and worse. When will we ask, How can we regulate the financial industry so this doesn’t happen for another 100 years or so?

Because it will happen again, you know it will. It’s the nature of the beast. The safeguards put in place after the Great Depression to prevent banks from collapsing, and the regulations put in place at that time are, by almost universal consensus, no longer working. That is because investment bankers have found ways around them, and retail banks and mortgage lenders, hungry for bigger bonuses and the chance to impress stockholders, have snapped up every chance to circumvent or slide under the law, just to make that extra buck. That’s what capitalism is all about.

The extra bucks have all floated to the top (what ever happened to the ‘trickle down theory?) and now the rest of us can’t afford to get to work. The entire economy is severely out of whack, so severely out of whack that no one even understands it anymore. Why not? Because it has never been this bad.

People who work for a living, or are laid off for a living, know this. Over 90% of us live on less than 50% of the money made in the US, and now that money is not being made. Fewer and Fewer people are working at all. Arresting a couple of suits and parading them around on TV is not going to fix any of that.

US prisons are already holding more people than any other country in the free world. Is there room in them for all the bankers who are breaking the law, or have done so during the housing bubble and the mess that followed? Probably not, but the image of shoving a bunch of bankers into shared cells with murderers, drug dealers, and child molesters is a compelling (and I confess, oddly appealing) one. Would they get tattoos? Would they become somebody’s bitch? Would they take up smoking?

Are there any Starbucks in prisons?

At the very least their presence would help even out the racial inequality in prisons across our nation. But until somebody addresses the underlying problem, it’s really just a big show.

Don’t hold your breath waiting for the big guys to go down.

They’re still in office until after November.

Starting today, Personal Finance Analyst is kicking off a regular weekly feature: Mortgage Tuesdays.

Every Tuesday we’ll be featuring topics related to mortgages and mortgage lenders; in short, everything you ever wanted to know and then some about borrowing money to purchase property.

In case you’ve been living in a cave since last summer and have just now emerged with the thought of possibly buying a house (to replace that cave), you might not know that the entire US is staggering under the weight of a burst housing bubble, made much, much worse by a wave of subprime mortgage defaults and foreclosures. You may be asking yourself,

“What exactly is ’sub-prime’ lending anyway, and how can I avoid getting tangled up in it?”

Sub-prime simply refers to any kind of loan made to a borrower the lender considers risky or less than ideal. Some people fall into this category through no real fault of their own: recently divorced persons, people who have been at their jobs less than two years, people who work for themselves, and people with nothing negative on their credit records but nothing positive either.

Other prospective borrowers fall into the ’sub-prime’ category because of bad credit, a past bankruptcy or foreclosure, or a high ‘debt-to-income’ ratio. When a mortgage lender decides to loan money to a buyer who falls into one of these categories, and that lender builds in features such as higher interest rates to compensate for the increased risk of lending to that person, that loan is called a sub-prime mortgage.

“What is a debt-to-income ratio?” you may well ask.

Your debt-to-income ratio consists of your monthly regular expenses (such as rent or mortgage payments, credit card payments, car payments, taxes and insurances, etc.) divided by your gross monthly income. Say you pay $735 a month in rent, you have a car payment of $350, and your minimum payment on your VISA card is $50. You make $2500 a month gross. You divide your total monthly debt of $1135 by your gross monthly income of $2500 for a debt-to-income ration of 45.4%

When mortgage lenders look at your credit report, not only are they looking for on-time payments and no past defaults or bankruptcies, they are looking for a debt-to-income ratio of no more 36%, with no more than 28% of that debt tied up in housing or rent expenses. So, in our example above, that person with the $350 car payment and the $735 rent payment would probably not qualify for the best rates on a conventional mortgage and would be instead looking at sub-prime rates.

Should our made-up person (let’s call him Bob) consider a sub-prime mortgage, or should he pay off his car and his credit cards so he can get a conventional mortgage at a good rate?

That’s not an easy question to answer, but there are some things Bob should do before he makes a decision or signs any papers. Here are some general questions Bob should ask himself:

1) Is this a reputable lender or a small lender that a broker found for me? If you’ve never heard of the lender, there’s a good chance your loan will be immediately sold to some other financial institution. This alone should make our potential homeowner Bob think twice. Some large reputable lenders do write sub-prime mortgages and keep them on their own books, but most don’t. Wells Fargo Home Mortgage is one major lender that does write and service their own sub-prime mortgages. If you think you might want to take out a sub-prime mortgage, look for a large, reputable lender that underwrites and services its own loans first and foremost.

2) What are the terms of the mortgage? Before Bob even asks about the interest rates, he MUST read the contract thoroughly, ask questions, even hire an attorney if he has to, in order to make sure he understands the terms. Many people who got into trouble with sub-prime mortgages agreed to loans that offered very low initial rates but had regular rate hikes written right into the contract. Some sub-prime mortgages even offered zero interest for five years followed by a variable rate structured in such a way that you could, in theory, end up owing more on your home the longer you paid on it. When that happens, it’s called negative amortization, meaning you never touch the principal on the loan and simply owe the lender more and more interest every year. Ideally, Bob should look for a fixed rate loan (the interest rate stays the same over the life of the loan), or a variable rate loan with a cap on both how much the interest can go up each year and over the life of the loan.

3) Can I afford the worst case scenario? Many people go into sub-prime mortgages counting on things getting better and better for them, because they really, really want a house. This is a very bad way to approach a sub-prime option. First of all, you wouldn’t be considering a sub-prime loan if things in your life hadn’t already gone less than well, so how logical is it to assume this will magically change? Look at what you will pay each month if your life goes great, and what you will pay if every negative consequence actually comes to pass. Are you still in your home and better off in both cases? Bob should not accept an 8% variable rate mortgage with a 10% cap on the rate over the life of the loan if he can’t afford the payment should the rate hit the maximum 18%. Period.

4) Am I feeling pressured or confused by the broker or lender? Bob should politely excuse himself and leave. Don’t answer when the lender calls back 400 times either. Find another lender. Talk to other people who had good experiences and find someone who treats you with respect and patience. Never, never let a broker’s need to close a sale cause you to commit to something you don’t fully understand or want. If you are feeling uncomfortable, that alone is a sign that you probably have a good reason to be nervous. Thank the person, get out as fast as you can.

If these questions have you feeling cautious just reading them, good!

You should be cautious. Very cautious. A home is probably the single biggest purchase you will ever make. If now is not a good time, pay down your debt, save your money, wait it out. It’s harder to get a sub-prime mortgage now than it was at the height of the housing bubble, but predatory lenders are still out there doing their thing. Don’t let yourself be victimized by them.

Here’s an idea: Stay tuned for the rest of the PFA mortgage series every Tuesday!

Stick around, and you’ll be armed to the teeth (with good information) that will enable you to get the best deal possible and truly live happily ever after.

That’s what it’s all about after all. Am I right?

Rodney Hixon is an ordinary guy trying to make an extra buck or two on the side, and why not? Living in the state of Michigan has never been more financially challenging, so when Rodney discovered that he could buy up slum properties In Kalamazoo with ’stated income’ mortgages that didn’t require him to show any proof of his assets or salary, he jumped at the chance.

Hixon, currently describes himself as ‘a former real estate agent’ who makes ‘a couple thousand dollars a year as the coach of Mattawan High School’s girl’s lacrosse team’. He was the ideal candidate for the creative ’stated income mortgage’ that became so very popular during the housing boom that preceded the sub-prime bust. As a former real estate agent he knew the area, knew the mortgage companies and their policies, knew the ropes, knew he could do it.

So, when a person wants to invest in real estate, the idea basically is to buy low, sell high, right?

Wrong!

In the past 15 months 38 of Rodney’s investment properties went into foreclosure, and it came to the attention of some Kalamazoo city officials that he had overpaid for each of the properties. In fact, Hixon had overpaid alot. On his 38 most recently foreclosed properties, Hixon paid between 2% and 375% over and above the city’s tax-assessed value, for an average purchase price on Hixon’s investment properties of 68% above SEV. Profits (for the seller) on Hixon’s 38 foreclosed properties (all of them in slum neighborhoods) topped out at $2.7 million.

On one property alone, Hixon saw a 1,837% appreciation in the short three years before the home went into foreclosure. That home, at 722 Egleston Avenue in Kalamazoo, sits in one of the cities most distressed areas and sold for $8,000 in December of 2002. Hixon purchased it in October of 2005 for $155,000. It went into foreclosure in June of 2007.

Hixon’s investment properties are all listed as rentals but few were ever rented, not even briefly. Most sat vacant from the date of sale right up to the date of foreclosure.

The FBI is currently investigating Hixon for mortgage fraud. They suspect that he might have been involved in a scam that goes like this:

A real estate agent, an appraiser, and a ’shill’ buyer purchase a slum property at many times its city-assessed tax value and take out a 100% mortgage on ‘creative’ terms. The shill buyer and the seller then divide the substantial profits amongst themselves, defaulting on the mortgage almost immediately, leaving the mortgage company or lender holding a bad debt on a property worth a fraction of its selling price.

The FBI would probably already have charged Hixon with something if it weren’t so horribly backlogged with similar cases occurring all across the United States. According to figures printed in the Kalamazoo Gazette, in 2002, the FBI investigated 5,623 cases of mortgage fraud that resulted in $293 million worth of losses for lenders. In 2006, the FBI was busy investigating 35,617 cases of mortgage fraud with losses totaling over $946 million. Figures currently available for mortgage fraud in 2007 are topping out at well over $1 billion, and by all accounts, at this point the FBI is not able to keep up with the number of claims in 2008.

In fact, as the chart above shows, the FBI is having no small amount of trouble just adjusting its tables and figures on this topic fast enough. You can look at other tables on mortgage fraud cases by year along with pending cases by year at the FBI’s own website, but that report hasn’t been updated since 2005.

Reading about Hixon, who tops the current list in Kalamazoo of foreclosed property owners, I couldn’t help but wonder what the real scope of this problem is, how deep it goes, and how much of it is institutional versus individual. Lenders often buy back their own foreclosed properties because it makes their books look a little bit better. (That is possible through some magical accounting process that I confess I do not entirely understand… sorry! If you do understand it, feel free to enlighten me here by posting why that works for them!) My question is this:

What (besides the law) would prevent lenders from doing the same thing Hixon is doing so successfully right in my home town? They would have to operate through a shill or third party and rip off some other lender of course, but how can we know that isn’t exactly what is happening as we speak? Kind of a very, very high stakes version of ‘hot potato’ and the one left holding the potato goes under. What a game! It makes Monopoly look positively warm and fuzzy!

Just ask Anthony Mozillo of Countrywide about those kinds of games. Countrywide is such a mess right now it doesn’t even have records that show how deep the mess is, and the records it does have, nobody can quite understand. Fewer and fewer employees remain to even look for those records, and I have no doubt that at some point everyone is going to just throw up their hands and exclaim, “Oh, nevermind!”

Honestly, I don’t want to rain on Hixon’s parade. He just got married after all, and he swears that everything he did is on the up and up and it’s all been very heartbreaking for him, losing all those homes. At least he has a sweetie now to soften the crushing blow.

I don’t know who he’s marrying, but if I were her, I’d want a separate bank account and a pre-nup.

In blood.

Yesterday my internet server was down all day, but I actually felt pretty lucky about it, since while I waited for it to come back on. I whiled away the hours watching local news shows that featured brand new houses in Wisconsin sliding into raging flood waters, sink holes swallowing up cars with people in them (two people died near here delivering newspapers Sunday when their car disappeared into a 50-foot sinkhole), and various photos of trees on cars, cars on cars, houses on cars, cars on houses, and so on and so forth.

Right now, 11,500 people in the mid-sized Michigan city where I live are still without electrical power, and the dog and I have had to take refuge in the basement twice in as many days, but finally, as Jack Nicholson said in The Shining, “I’m b-a-a-a-ck!”

I’m waiting for the plagues of locusts that are sure to follow this summer, that is, once the tornadoes and floods get done with us this spring. That would be about right, since the only creatures around here that appreciate this year’s weather are the 21 tomato plants I put in our Victory Garden last week. They’ll make good eatin’ for those locusts alright.

It’ll be just like The Tomatoes of Wrath.

Recession? Oh yes, but the way, we are in a recession. Here’s a quick recap of the major recession issues of the past week, along with pithy commentary on each:

Should the Gas Tax Be Dropped for Temporary Price Relief?

No, God no. First of all, the gas tax is what helps keep our deteriorating roads and bridges from deteriorating even more. Second, the price break would be so tiny as to be gobbled up almost immediately by increasing demand. We would net nothing, and our roads would suffer even more. (Did somebody say, “sinkhole? ” God, what a horrible way to die, delivering Sunday papers and then just getting swallowed up by a the mother of all potholes. Does anyone doubt we are dealing with Divine Wrath here? And you think repealing the gas tax will help?)

Should the Federal Reserve Lower Interest Rates Again?

Lower them to what? A negative number? Look, right now Ben Bernanke, Federal Reserve Chairman, has two public roles: 1) Spin current events in such a way as to minimize panic, and 2) Lead us in prayer. He also has a private role: Print new money to keep some of the biggest financial concerns in the US from going belly up week to week (or even day to day) and thinking of other creative ways to prevent that same negative outcome, if he can. Yesterday Lehman Brothers, after posting a $2.8 billion loss, raised $4 billion and plans to raise $2 billion more, but this is not good news. Moody’s downgraded Lehman Brother’s credit rating yesterday from stable to negative. Its stock has plummeted 60% over the past 12 months. The bank where I work? Started at $5.81 yesterday, down to $4.51 at close. I may soon have more time to write.

Should the US Step Up Ethanol Production?

Sure, if we can make it out of switchgrass and not use any of the land dedicated to food production to do it. Otherwise, no, we have bigger fish to fry than that, and possibly no cornmeal soon to fry them in. At a time when the US really needs a bumper crop of corn and soybeans, both are already suffering badly, and the recent torrential rains in the Midwest will almost certainly wipe out a certain percentage of these crops entirely. It’s too late to replant, and the poor outlook has global consequences that make our gasoline complaints look like very high class worries.

Should We Drill in Alaska, or Off-Shore, or on the Moon?

No, no, and no. What we need is any energy policy. We needed one 20 years ago; still need one. Buy a bicycle, take public transport, work from home, plant a vegetable garden (watch out for the coming locusts though), and hang onto your hats. You ain’t seen nothin’ yet.

And yeah, that goes for Toto too.

As home values continue to plummet and foreclosures continue to rise, the speculation on the proposed acquisition of Countrywide Home Loans, the largest and most troubled mortgage lender in the US, by Bank of America, the largest commercial bank in the US, has gotten to be a lot like the speculation on what Brad and Angelina are up to these days, and whether or not Brittany Spears in going to get her kids back or shave her head again.

After balking a few weeks back at assuming all of Countrywide’s bad debt (which would basically render the deal no deal at all), Bank of America recently came out and confirmed that yes, Houston, all signs are still ‘go’ at this point. The deal is set to close by the end of September. A lot could happen by the end of September. The way things are going, I’m kind of scared about what’s coming up this week: September? Will we have a September? Promise? Somebody promise me we will have a September and I’ll feel a lot better no matter what Bank of America does or does not do.

On the face of it, BOA’s planned acquisition of Countrywide makes instant sense and also seems completely insane. It makes instant sense because once the smoke clears and the housing market reemerges, Bank of America will be poised to suck in most of the money and most of the business, and then go on to sell all those new customers its other financial products like credit cards, deposit accounts, investments, car loans, and so forth and so on.

If Countrywide was the giant of the mortgage industry, Bank of America, by consuming Countrywide, will have the potential to become the Monster that ATE the Giant of the mortgage industry, once things are back on track. BOA will make Godzilla look like a punk kid.

Bank of America will be Megagodzilla.

The acquisition is completely insane because right now, not only is Countrywide hemorrhaging money from every financial pore, it is also the target of so many lawsuits: federal lawsuits, regulatory lawsuits, lawsuits initiated by its own stockholders, and who knows what else; that it can’t keep track of the trouble it is in any better than it kept track of its paperwork and underwriting and mortgage documents that got it into trouble in the first place.

Besides, BOA ALREADY makes Godzilla look like a punk kid. Bank of America already is Megagodzilla.

BOA will be paying $4 billion for the crippled lender Countrywide, a fire sale price to say the least, and maybe not a bargain at that. Lots of people want to see the deal happen because they think BOA’s sizable assets will shore up the tanking mortgage industry and keep people in their homes. I’d say this is a questionable assumption, especially that second bit. But say it does go that way and the day is saved: At what price has the day been saved? I think its a valid question, and one that isn’t being asked enough if at all.

It strikes me that the steadily increasing trend toward mergers and acquisitions in the financial industry can be arguably blamed for much of the unsteadiness (to put it kindly) in that same industry. When banks or lending institutions get that big, the emphasis comes to be more and more on quick and dirty profit, the money floats to the top tier of movers and shakers, and damn the existing customers.

The pressure on sales people at all levels in banking and lending is so enormous right now that they are practically told to break rules in order to generate profit, then blamed and fired if they get caught breaking rules they were pressured to break. So on the one hand, here’s your required one hour of training in banking and lending regulation along with all the 200 things you must never on pain of death do, and on the other hand, get out there and do all 200 and then some or you’re fired.

Meanwhile, frustrated customers waste hours on 1-800 customer service phone trees only to reach someone who knows nothing, has no authority to fix anything, and wants to shoot him or herself but can’t because that person knows the family would get charged for the headset post mortem.

I recently received this reply while asking about customer retention in a meeting, “Look, we don’t care about the customers we already have. We want new money and that’s all we want. If you can’t sell an existing customer something new then get them off the phone and move on. If you help one of them, then they’re all going to expect it.”

This was in response to me raising a concern about several customers who had pulled about a quarter of a million dollars each and gone to another bank due to poor service and uncaring attitudes.

Bank of America and Countrywide can get married if they want to–It’s a free country after all; freer every day in fact in terms of regulatory oversight; much freer than it has been since the early days of the laissez-faire capitalism and first industrial barrons like the Vanderbilts and the Carnegies.

Besides, when did the possibility of consequences ever stop anybody from getting married?

I personally would like to see a hard correction followed by a return to smaller commercial banks, much tighter mortgage lending regulations, and a sense that people matter more than profit margins.

Yeah, that’ll happen.

Is anybody dizzy yet? Maybe a better question is, is anybody not dizzy?

Awhile back I noted here at PFA that the FDIC has this year placed about 70 banks, mostly large regional retail banks (as opposed to investment banks like Bear Stearns) on an ‘endangered’ list. Today the specific large regional bank where I work as a part-time CSR was put on probation by the Federal Office of the Comptroller of the Currency, a scary way of saying that the bank where I work is now under much tighter federal regulatory scrutiny than ever before. This in spite of raising $7 billion in additional capital last month. The last I looked today, our stock was down to $4.91 from a 51 week high of $54.71. I’m no high roller financier, but this strikes me as a bad thing. Even so, I was ready to reassure any and all customers who called with concerns, FDIC brochure in hand.

No one called with concerns.

I think the reason for that is that ordinary people have known for over a year that things in this country are incredibly screwed up economically. It is getting so that news can’t even get bad enough to freak anyone out anymore. Banks on the verge of failure? Yeah, big deal. Oil prices skyrocketing faster than the Space Shuttle? What else is new. Unemployment up to 5.5% In a pig’s eye; doesn’t even count the people who gave up looking months ago. And so on and so forth.

The extent of the damage done by the subprime mortgage crisis is unfortunately still playing out, and sadly, it’s playing out at the same time that global oil supplies are becoming tighter and tighter (some might even say at a time when global oil supplies are running out, but that’s a different post). A severe correction had to occur, with housing prices ridiculously inflated and mortgages being sold on insane terms and underwritten by people who were apparently taking large amounts of LSD.

The government is looking into the possibility that speculation in the commodities markets is helping to drive inflation in oil and food prices, but does anyone really believe that is the root cause of this year’s financial instability? Certainly speculators are moving into commodities now; there certainly isn’t any air left in the real estate bubble, so it is necessary to find other ways to create money out of nothing. I would ask why it has become so necessary to make money out of nothing?

Clearly, it’s because we no longer are making money off of something: cars, electronics, clothes, weapons, things, all going overseas where labor is cheap, costs are low, and regulation has too many syllables so it’s just left out of the language completely.

Personally, I believe that is the problem. The Federal Reserve can’t fix that part of this problem. The Fed can secretly loan money and broker deals, but that is only going to temporarily staunch the most severe bleeding. The root problem US markets are experiencing can only be fixed through the kind of intervention Franklin D. Roosevelt championed after the Great Depression.

There, I said it.

We need to get people back to work, not just send them $300 checks on borrowed money. We need to repair our crumbling infrastructure and we have lots of unemployed people who would be more than willing to do it to feed their families. We need to attract green industry to this country and start to lead the world by example in this area. We could be manufacturing electric cars right now and people would buy them faster than we could pump them out. Are we doing this? No of course not. We’re moving our auto industry overseas and selling them our badly-made, expensive-to-run gasoline powered cars.

The irony of it all for me is that last month I actually sold half a million dollars in bank products, which means if I still have my job at the end of June I’ll actually get some decent commission.

Oh yeah, I’m dizzy. In fact, I’m starting to feel a little nauseous.

How about you?

Poor Microsoft. One minute they’re a towering colossus-cyclops striking terror into all rivals with a take-no-prisoners, get-er-done first and get-er-done cheap strategy that blows everyone else right out of the water. A few anti-trust suits and international wrist-slaps later, and suddenly they’ve got upstart ingrates and whippersnapper smart-alecks like Apple and Google kicking them in the shins and laughing all the way to the bank. And as if that all wasn’t humiliating enough, the next thing you know even Yahoo is telling you to go take a long hike off a short motherboard and stuff your billion dollar offers where the sun don’t shine. Well. Excuse us for dominating.

What’s a mega-corporation to do?

How about teaming with PayPal and creative young tech company Jellyfish to offer cash back on purchases made by using the Microsoft Live Search engine instead of stupid-face Google or ingrate-snotnose Yahoo? Customers love cash back, right? And how about souping up the Live Search shopping function with lots of cool extras similar to tickets, prizes, and other swell stuff nerds can already earn just by using Microsoft’s Live Search Club for Gaming? Announce that, get it in front of the public, and pretty soon people will be saying stuff like, “What’s a google?” And, “Does Apple still produce Beatle Albums? Or did you mean Fiona Apple? My mom has an apple tree. Do you have an apple tree?”

So Microsoft announced the new grand plan. Here is what they had to say about it:

On Wednesday, we will be announcing a major new initiative that our search teams have been driving. We are getting better and better with our core algorithmic search, and at the same time, we are investing to differentiate in vertical experiences and to disrupt the current model. You’ll hear more about our plans Wednesday.

Great. I think. I mean, I kind of nodded off there for a minute so I’m guessing what they said is in fact a good idea. I figured I’d go check it out myself, so I went to MSN expecting to learn all about it and maybe buy some stuff and make some cash back too (yay!) but guess what? It seems to not quite be there at all… yet. I guess they aren’t done differentiating to invest in those pesky vertical experiences. Yeah, I know how rough that part is, that vertical experience part. Bastard verticals.

Listen, can we talk for a minute? I mean just you, dear reader, and me, smart-mouthed blogger, just the two of us, mano et mano. I just want to ask you one question:

If you were stranded on a desert island with two nerds and one of them was Bill Gates and the other was one of the Google kids who plays video games while hauling down a zillion dollars a year at their awesome corporate playground, who would you trust to get you off the island if you could only pick one guy to get you off? (So to speak.)

Yeah, that’s what I thought. I’d pick the Google guy too, maybe marry him or something, or at least get a job lead as we coasted safely into home territory. Meanwhile, back on the desert island, I’m guessing Bill would still be trying to get past Vista on his handheld. He might also be back there smashing things with coconuts. Hard to say.

Microsoft knows it is in trouble and knows that it’s heavy-handed bullying approach to mergers and acquisitions isn’t likely to help it against forward-thinking Google and Yahoo, neither of which cry many tears over love lost between themselves and Microsoft. The internet is rapidly evolving into a new entity, one in which the lousy operating platforms designed by Microsoft and shoved down the throats of frustrated PC users are right on the verge of becoming obsolete. Already Google is offering its own online business software and services, and innovative companies are appearing faster than baby shrimp at spawning time. Some are reaching maturity before they can be gobbled up.

Competition can be great for customers when competition is spurring innovation, price declines, better service, new jobs, and new money. If Microsoft can keep up, especially if they can keep up by offering cash back on purchases just for using their search engine, that’s great. I’ll be there in a heartbeat.

If they can’t, oh well. Winning at any cost always works for awhile, but most of the time it quits working right about the time the initial idea gets old. At that point, all the bullying in the world won’t do much except confirm your reputation as a big bully.

I’m waiting. As soon as they work out that vertical whatever, I know I’ll get my email and I’ll be off in a flash to buy a case of black currant tea online, and I’ll buy it on Microsoft Live Search and post my cashback reward right here at PFA. Until then, I’m finishing off my hazelnut coffee bought right here in the real world. I’m ready though. I’m an open-minded kind of blogger.

Stay tuned.