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Thursday, March 19, 2009

Piling on

Now that the AIG guys have been identified as the official National Scapegoats for the Financial Meltdown™, the politicians are falling all over each other trying to step up and score some points by beating on them. Today it was Salem's turn, with the bobbleheads in the state capitol announcing that they want their pound of flesh from any bank type who gets a bonus while his or her company gets TARP money, just like the feds propose to do with AIG. Meanwhile, Attorney General John "Press Release" Kroger declared today that yes, we are joining New Jersey to sue these people!

And to protect us from having this happen again, they're going to...

Ahem... I said, to stop this from ever happening again, they're going to...


Comments (15)

Jack, my bill is going to provide oversight of how the TARP dollars at state-chartered banks are spent and recommend improvements to regulation of state-chartered banks that receive TARP funding. Reporter Jeff Manning asked me if I knew of any malfeasance, and I said, "No, and I want to keep it that way."

This post at Blue Oregon lays out some of my concerns and it links to the bill.

"Ahem... I said, to stop this from ever happening again, they're going to..."

Perhaps, in protest, PERS will give back the $270M they got from AIG. They wouldn't want tainted money, now, would they?

I am curious about whether they will stick this tax up their Fannie Mae and Freddie Mac too. Those guys seem to be just as deserving.

I am also a little curious about how much this can be hyped. Let's see, if Congress taxes these bonuses in the 90-100% range as is being proposed, and Oregon taxes them up to 35%, and New Jersey jumps in with something as well, and who knows who else, then that adds up to ...?

What about a tax on the Congressmen who voted for these bonuses? Would that be fair?

my bill is going to provide oversight of how the TARP dollars at state-chartered banks are spent and recommend improvements to regulation of state-chartered banks that receive TARP funding

Right now every level of government is facing excruciating budget cuts that are going to adversely affect the lives of most, if not all, Oregonians. How much is this brave new world of state regulation going to cost, who's going to pay for it, and realistically what could it possibly achieve?

"And to protect us from having this happen again, they're going to...

"Ahem... I said, to stop this from ever happening again, they're going to..."

... stop giving bailouts to failed companies?

... stop rushing massive new spending legislation through due to "urgency"?

Not a chance! Next up for bailouts: automakers.
Prepare for the next round of: how dare they spend taxpayer dollars so wantonly! We expect that when we give taxpayer dollars to companies that have run themselves into the ground, they will then rise like the phoenix and make us proud of them.

AIGFP (AIG Financial Products) is an AIG subsidiary located in London. Does its employees, who live in the UK, even pay US taxes?

Your concerns are well taken, but we'll learn how Umpqua and Premier are and will be dispensing TARP dollars, and it will be done in an open forum. I have concerns about trusting the FDIC and Treasury to manage these state-chartered bank TARP expenditures from DC. Their track record is lacking.

Task Forces can be done with little money, basically with existing committee staff. It's like running an extra interim committee. And as you know all regulation of banks, state and federal, are paid for by the banks themselves, which is twisted frankly, but is nonetheless the current reality.

The banks can share with Oregon what they've been doing with TARP funds. But I think we have a need, and as a state rep. I have a duty, to know what they are doing and intervene if red flags arise.

Mob behavior can lead to dangerous outcomes.

Nothing like our esteemed legislators with a solution in search of a problem. You people are beyond pathetic.

"It's like running an extra interim committee"

banking by a committee of politicians, what a great idea. I am sure this has never happened before with disasterous results.

Well, how will legislation like this affect companies like Goldman Sachs, which also received TARP money?

Last week, GS emailed some of its employees to offer in-house loans to help them pay their mandatory contributions to certain GS investments funds. Apparently these contributions are a condition of employment, so employees who do not make their payments could lose their jobs, or have their brokerage accounts seized or be sued. Some of these mandatory contributions are due next month.

At first this sounded to me like indentured servitude, which is of course shocking in this day and age. But what if these are 0% loans which GS has to power to forgive somewhere down the line? Won't that, in effect, turn these loans into bonuses or retention payments?

Didn't take you long to see this scam for what it is Hopeful, hope others are as astute.

And now that they have realized the public knows that the government specifically allowed the damn things in the bailout bill language to begin with, they are looking to put in on Geitner and let him go down as the fall guy. It think this may have been their plan all along.
Dont let Obama and the "hope and change" administration fool you, folks. Its business as usual in Washington. Nothing has changed.
But I suspect all this will be treated just like politicians in Portland are treated. As long as there is a "D" next to your name, all is well.
If this was happening while the last administration was in charge, there would be words like "crooks", "swindlers", tossed at them.

At least we still have the "Hope" part to keep us warm.

Rep. Chip Shields,

Appraisers are locally licensed but their output forms an integral part of nearly all the lending that is at the heart of so-called "credit crisis". 18 USC 1014 makes it a federal crime to overvalue "collateral" that accompanies nearly every affected loan.

The federal Crime Victims' Rights Act appears to cover borrowers rather than just financial institutions and the US government.

The Oregon legislature can do something about local appraisers.

An appraiser can choose from many methods. The one used routinely by Realtors doing a Comparative Market Analysis (CMA), in their sales pitch to a seller, is at the high end. It does not isolate out the impact on the price that resulted from creative financing for the comparables. The professional appraisers are usually former sales agents and typically do what they have always done, paint a rosy picture on price.

Other methods include an income approach (i.e. rent based) or replacement cost.

There is quite a disparity between the price from an investor's perspective and from a nothing-down first-time home buyer's perspective. The latter will pay, or agree to pay via a loan, far more for a home than an investor will pay. The higher price is not because of the higher value of the collateral but is because of creative lending terms. The creative financing does not usually result in lower payments while holding the price constant but is instead used to boost the sales price, or rather the offer price.

Dual Appraisals.

I want to see dual appraisals on the "collateral" for every residential sales transaction for any loan that is covered by 18 USC 1014. One of the appraisals must include the income method. I could settle for a simple notation on what the monthly rent is, from which I could multiply by 120 to derive a ball-park valuation based on capitalization rate (used to compare investment opportunities among and between classes of investments).

The Oregon Supreme Court has demonstrated the capacity to distinguish the financing terms for a buyer from the investment itself. See Wilsonville Heights v. Dept. of Revenue, S50763 2005. http://www.publications.ojd.state.or.us/S50763.htm
The lending constraint that a home be owner occupied is analogous to the lending constraint in the Wilsonville case.

I view the home buyers that pay a 50 percent premium, or more, for a home over the investment value of property as the victims of predatory pricing AND lending. It is facilitated by local appraisers without whom the scheme could not be perpetuated. The sellers got the bulk of the lent money, and it is from them that we must demand recovery of unjust enrichment.

The predatory lending legislation from last session was incomplete. The bulk of residential sales in the last several years are voidable, provided that the buyers of overpriced homes -- through exorbitant debt -- obtain competent counsel or advocacy. Yet these victims are berated as scoundrels. Most deals were not by the knowing-flippers, but by ordinary people trying to obtain shelter. They also faced the sales pitch that if they waited that the price would be much higher later and that it was a wise "investment" decision to buy/borrow now, knowing that the price was already astronomical.

If the state were to demand that state licensed appraisers submit an income method appraisal -- along with an ordinary one based on comparables -- for all residential lending deals covered by 18 USC 1014 would the federal folks have any legally supportable basis to object to this state requirement? I think not.

If I, as a real estate broker, individually (and uniquely) demand that in any deal I participate in, either representing the seller or buyer or both, must be accompanied by an income method based appraisal I will get nothing but astonished stares from folks. Most folks, as far as I am concerned, have no business calling themselves professionals, or offering investment advice.

The bankers know all about the lower value appraisal of homes, and the premium prices paid by know-nothing buyers and their agents and appraisers, as it is the bankers who use it themselves in calculating what they themselves could get for a home upon foreclosure and sale of a home at an auction to some investor. The "value" of the collateral is at this lower end, not the higher end. The spread between the two, the premium charged to know-nothing buyers, is the arena of predatory overpricing/overlending for homes. If a home requires a foreclosure sale then the transaction cost to liquidate the collateral should be fully covered by an upfront demand for a down payment, and is a major reason to demand a down payment.

If a banker has in hand a lower valuation based on a local appraiser's use of the income approach would they then find themselves constrained to limit their lending amount to that lower appraisal? Of course they would, by reason of federal law. Would this, over time, affect the appraisals where the so-called professionals use only comparables? Of course it would. Is it good public policy to require this lower appraisal from local appraisers? Maybe, maybe not. But is an Oregon appraiser truly a professional (or ethical) if they profess to be blind to it (while it is a required part of their licensing education), particularly when they purport to represent the buyer rather than the seller and the lender. They represent the taxpayer interest too, as evidenced by 18 USC 1014, and ultimately the measure of payout for all manner of lender/seller bailout?

If I had copy of every appraisal on residential property in Oregon during the last fourteen years then the fact of willful and systematic overvaluation would be self evident. How much must a subsequent sale price be below a previous appraisal before a prior appraisal is considered fraudulent?

I live in a small manufactured home, attached to another, on a pint-sized lot and the county has it valued at $184,000. It would have to rent for $1,533 per month to rationalize such a price. A renter that earned $27,594 per year would need to use the entirety of their after tax income just to pay the rent. This is before paying for utilities or food or any other expenses related to the second lowest rung on Maslow's Hierarchy of Needs, safety.

The average private laborer hourly wage is $18, or roughly $36,000 per year for 50 weeks, excluding the unemployed and part-timers.
I use a mortgage with a ten year amortization and ten percent interest to obtain a loan payment calculation that is roughly comparable to what an investor looks at for rental property valuation based on rent. The payment on $116,000 in debt would be $1,532.95. The payment on $185,000 in debt would be $2444.79.

The maximum payment our average private laborer could make is roughly 31 percent of their income, or $930 per month. The payment on $70,400 in debt would be $930.34. This average private sector laborer, if they had saved enough to put 20% down, could buy a home for $88,000. That is less than half the price that Multnomah County has valued the less than average home that I live in, a manufactured home on a tiny lot and attached to another, $185,000.

The rent for the home I live in would be roughly $930, and certainly not $1,532.95 or $2444.79, based on market conditions as reflected by private sector wages.

The Oregon Supreme Court in the Wilsonville case considered the method chosen by the appraiser as a matter that was left to the professional appraiser. I would not insist that the income method be the only method, only that it must be at least one of the methods, so long as there is a loan that is subject to 18 USC 1014 criminalizing the overvaluation of collateral. This is something the legislature can address.

"The banks can share with Oregon what they've been doing with TARP funds."

I'll save you the trouble. They "banked" it. That is, it either went into reserves against bad debt or a slush fund for buying smaller banks. AAA credit customers now have to run the gauntlet for loans, even if the banks have it.

At first, I thought TARP was a good idea, but the execution on this has flopped miserably (under both Bush and Obama.)

I was kind of hoping it would be used to take bad debt off bank sheets. Like if you have akid who can't manage money and needs $100 to pay bills. You can either:
1) Give $100 to spendthrift kid, or
2) Pay directly for $100 in bills
THe more effective solution is 2).

If they had somehting like TARP which would buy debt off banks (do somehting like a Dutch auction), then you force more cash onto banks and in a way force them to loan it.

Then again, these are politicians who get a lot bucks from lobbyist (like for AIG and Goldman-Sachs) so I am not surprised at the general ineptitude.

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