Last Wednesday 15^th February, Citigroup has agreed to dish out $158.3 million to settle claims made by the U.S. Government that its activities had caused the government to suffer losses running into millions and millions. They had submitted defective loans to mortgage insurance programme of the federal government.

The settlement is line with another agreement contracted with Bank of America in the week previous. It is a warning that banks have not seen the last of hefty penalties for their part in the foreclosure crisis.

On 9^th February 5 mega mortgage servicers struck a deal of $25 billion with federal government and the state attorneys general for their alleged foreclosure wrong doings. One point that was posing a hurdled was how much the banks would be let off from future mortgage related claims.

As per a statement of the U.S. attorney for New York that had filed against Citi the aforesaid complaint, under this deal the administration has “retained its full authority to pursue civil fraud lawsuits … for damages and penalties when a bank fails to satisfy underwriting standards on government insured loans”.

Included in the settlement with Citigroup the CitiMortgage arm of the bank had to admit that it had failed to observe the underwriting requirements as laid down by Federal Housing Administration’s insurance plan. The latter is under the administration of HUD (Housing and Urban Development).

The complaints states that CitiMortgage had submitted loans as per this plan certifying these to be eligible when reality they were not. This caused the government to incur heavy losses when the loans defaulted.

A large proportion of insurance claims to the tune of $200 million that were made and HUD has had to pay out on loans that CitiMortgage had originated or had underwritten from 2004 showed that loans were not eligible for this insurance coverage of FHA and should “never have been insured”.

Citigroup has assured that since then it has improved its procession and has kept aside dollars for covering this settlement.

A week before Bank of America had given the nod to paying $1 billion for settling allegations along the same line that had been brought by U.S. attorney for New York (Eastern District). The Southern District had initiated other cases in 2011. Last May a case for $1 billion had been filed against Deutsche Bank.  Allied Home Mortgage Corp has also to face a smaller claim.

Representative of Deutsche Bank did not comment while that of Allied was not available for making comments.

The foreclosure crisis has battered the image of Bank of America. Today it requires plastic surgery to give it a face lift. The work is being done by Anne Finucane – not an easy task.

Early last December Bill Clinton was one of her co-stars at Orlando in a conference hall. The interview with Clinton was choreographed in front of a chosen bund of business heads. It was included in a bigger effort to make respectable once again Bank of America – a demonized cult figure among the corporations today in USA.

Till recently Bank of America after headily swallowing up one entity after another became the biggest bank in the country. But from 2008 till 2009 when the financial crisis held sway, no other bank has lost more lustre than BofA. Currently Bank of America has come to symbolize all that went wrong with the banking segment – exorbitant unjust fees and fraudulent foreclosure of residences; the investors have not failed to give it a black eye. In 2011 the price of its share tumbled 55 cents causing it to become the biggest loser in the Dow Industrial. The regulators continue to keep a sharp eye on the bank.

No wonder then that the challenges before Finucane are daunting. She is a powerful personality in Bank of America and in the entire banking segment of America. Ironically she is neither a financial magician nor a banker even. Officially she is the Global Strategy and Marketing Officer. This designation does not do justice to her hold within BofA and Wall Street and even in Washington and outside it.

Her career spans 17 years. At the age of fifty nine she has built up inseparable relationships with the heads in business, media, politics as well as philanthropy. For many years she has been Kenneth Lewis’ confidant. The latter built up BofA by taking daring steps in acquisitions. His downfall was a marker in the financial mayhem. Today Finucane is close to the successor of Lewis – Brian Moynihan who has been battling to turn the trend and bring back the ship to shore. Moynihan is the CEO but the Finucane is the main image personality.

Jokingly Moynihan had once hit upon the truth when he said, “We all report to Anne”.

Finucane does not think that steering back the bank to calm waters is trifling matter. She has intimate links with Boston and Washington, is on easy terms with Barney Frank and holidays in Cape Cod.  She and her husband Mike Barnicle are considered to be category ‘A’ couple. But despite all this she is not in a comfortable position lately.

Photo by Shannon Clark

Investigations are indicating that Fannie Mae intentionally turned a blind eye to the warning given about the impending foreclosure crisis.

Nearly all the problems that Nye Lavalle had dug up and identified in 2003 have now become known to the public. The allegation is that the mortgage titan intentionally refused to see the gathering storm in the horizon – something that was obvious; knowing this is crucial for talks and decisions pertaining to the future of the agency.

For years Fannie Mae was running irresponsibly ignoring signs and warnings about the housing crash. Nye Lavalee’s property had been foreclosed upon and he began to suspect the circumstances that led up to it. He found that the companies that did the mortgage servicing for Fannie Mae regularly indulged in filing documents pertaining to foreclosure that were false.

The report (O.C. J. Case No. 5595) is to say the least is damning and indicates how grave and penetrating the problems relating to mortgage and foreclosure were swelling up leading up the bursting of the balloon.

The New York Times obtained a copy that states “It is axiomatic that the practice of submitting false pleading and affidavits is unlawful”. Even an acknowledgement is made that Lavalle found such a point that requires quick action to be taken.

Lavalle himself had never seen the O.C.J. 5595 but after he was informed by New York Times regarding the findings Lavelle commented that it seems Fannie Mae together with its entire entourage of lawyers, servicers and directors seemed to adhere to a policy that was institutionalized – “turning a willful blind eye to evidence of mortgage origination and servicing fraud”. He added that when Fannie was directly confronted with these evidences it took no steps to address the issues and take remedial steps; on the other hand it continued with its institutionalized fraudulent operations that covered up their fraudulent foreclosures.

Fannie Mae and Freddie Mac have got nearly $150 billion as support from the federal government following the collapse of the housing market.

When the future of Fannie will be raised in the Congress, the time from when Fannie knew about the abuses to its full extent will be a deciding factor. It relates to Freddie Mac also.

Last December the regulators of the federal government initiated civil charges relating to fraud against six of its former executives who had held top posts in Fannie Mae and Freddie Mac.

Photo by futureatlas

The Democrats have not been happy for a good while regarding Obama government’s handling of the foreclosure crisis. But recently they are beginning to get more organized. Last Monday 23^rd January the government was lambasted by both the Democrat legislators and the liberal groups. Their contention was that the imminent settlement seems to be too lenient on the banking world.

Government officials have informed that the settlement with the major banks that kicked off in the fall of 2010 is about to be finalized – only finishing touches being given.

Shaun Donovan of HUD and Thomas Perrelli – Associate Attorney general conferred last Money with the Democrat attorneys general to mull over the suggested terms of the settlement, informed Tom Miller the Attorney General of Iowa. Miller has been leading the investigations. Another meeting was scheduled to be held with the Republican A.G.s on the same day.

The officials of both the federal and state governments are “discussing the details of the progress we have made so far in settlement negotiations, including the terms we must still resolve” informed Miller. In the statement he added that till now no agreement has been finalized with the five mega servicers of the country and most probably it will not be completed within the last week of January.

There is no doubt that the Republicans will come down heavily on the final settlement as they have long been criticizing the flow of the talks. In 2011 spring many attorneys general of the Republican camp had argued reduction of principal is not the right course to follow as it has no connection with the foreclosure wrongs that happened.

Addressing the mayors of the country in the third week of January, Donovan said that one million families victimized by foreclosure would be helped by the settlement; the principal due on their loans would be reduced. Donovan lauded the writing down of principal as being “perhaps the most important step we can take in the short term to help the housing market”.

But the criticism against the impending settlement is increasing even prior to the announcement of the final terms. The rough outlines of the settlement have been made known but there are still some pockets of uncertainty regarding possibilities of future legal suits that prosecutors would be free to take against the banks.

Anti-foreclosure groups like MoveOn.org have started demonstrating outside a hotel in Chicago where the attorneys general were conferring, and in front of the campaign offices of Obama.

Photo by aflcio

Various economists are coming forward with other suggestions to tame the continuing foreclosure crisis.

The local investors have a pivotal role to play by buying up distressed units and then leasing them out to tenants. There is no dearth of investors wanting to buy houses but financing is a hurdle. The main loan-givers in 2008 were Fannie Mae and Freddie Mac. But after facing huge losses they are hesitating to sanction loans. Previously to any one applicant they would grant purchase of ten houses but today it has come down to four. Experts feel that it should be increased to 25. Since they are titans in the mortgage market this would have a sizeable impact on the housing segment.

Investors of today are quite different from the vultures that ran amuck during the time of the housing boom. They pay cash to buy but are restrained by mortgage constraints. It is imperative that they are financed.

Since the last four years the prices of distressed and traditional houses fell simultaneously but recently another pattern is emerging. Since the last one year prices of homes have been down by 4.3% in last November but after separating the distressed category of houses, the drop has been by a mere 0.6% as per the findings of CoreLogic.

The legislators should mull over another point – elimination of taxes on capital-gains when houses are bought on a long term basis for turning them into rentals. This was the view of Professor William Wheaton (Economics) of MIT. He said, “We need to re-establish equilibrium. I don’t want to see another spike in house prices, but the homeownership rate is dropping and we also don’t want to see rental spikes”.

The finalization of a group of regulations that have been pending would expedite lending matters. The overreaching of the government to bail out Fannie Mae and Freddie Mac put brakes on a calamitous shock but since then nothing positive has be done to revamp either the two firms or the housing-finance segment of the economy. It is however doubtful if any such overhauling will be undertaken prior to the elections; but small steps could make banks less wary about opening their lending purses.

The most important step that can and should be taken to bring back health to the housing market is reduction of debts. Banks are worried that this could lead to other borrowers defaulting. This can be parried by giving equity stakes to the investors and also this relief should be limited only to those who are deep underwater. The write downs should be earned – the borrowers will get relief only by staying current on loans.

The foreclosure crisis has spawned a spurt in advertisements that is not sparing either bridges or school buses. It has been referred to as “a visual crime”  and “commercial graffiti” and is leading to renewal of debate about how the government tries to raise money during hard times.

Following the Great Recession the report cards in a Colorado school district is full of advertisements. In Utah new legal measures have been taken to permit advertisements on school transport buses The Mayor of Chicago Rahm Emmanuel struggling to fill a budget hole of $600 million is trying to raise from advertisements on city properties $25 million – on bridges, electrical storage-boxes and even garbage vats.

The new measure started off this November with advertisements of Bank of America on the eighty one year old Wabash Avenue Bridge spanning Chicago River. Linda Rosenthal a resident of Chicago thinks the move to be “disgusting”. She said, “The architecture in Chicago is stunning. To see this awful advertisement angers me”.

The advertisements of Bank of America with its logo is in white with the lettering in blue, are placed on the tender houses that contain the equipments used to increase the height of the bridge to allow passage to tall boats. It has cost the bank $4,500 to place seven signs for a month said Kathleen Strand, a spokeswoman of the bank.

Strand said that the new move will contain “policies to protect the integrity of Chicago’s façade”. It was compared with the move taken by Chicago Transit Authority to rake in $20 million per year from surfeit of advertisements on buses and from trains that ran on elevated tracks. None are angry anymore about these. Strand commented, “The municipal marketing strategy is really about pursuing innovative opportunities to avoid having to cut city services or increase the tax burden on Chicagoans”.

But even then the question remains about where and when the line will be drawn. Will the Water Tower be the next victim or perhaps Buckingham Fountain in Grand Park?

Contradicting opinions are being expressed in the two major dailies of the city – Chicago Tribune and Chicago Sun-Times. Blair Kamin, an architecture critic said that this move was a “visual crime” and “a grotesque cheapening of the public realm”. An editorial the Chicago Sun Times noted that although the advertisements were unappealing it was preventing the local economy from “going bust”.

There is a strong possibility of about 50% that FHA or Federal Housing Administration will have to be bailed out in the forthcoming year if the market further falls. In a report this was disclosed by independent audit of the agency.

FHA offers guarantees to private lenders against defaulting mortgages. It has a cash reserve of only $2.6 billion; last year the figure was $4.7 billion.

It is the foreclosure crisis that has added to the woes of FHA. In the previous three years the agency has honoured insurance claims amounting to $37 billion because of homeowners defaulting. This has led to the shrinking of its cash reserves.

The audit reached this conclusion by calculating the losses on mortgages and the revenue expected from premium. As per the law FHA is mandated to keep cash buffer to the tune of 2%; since 2008 it has failed to meet this requirement.

The view of the audit is contradicted by the officials of FHA. They think that this agency, now 77 years old, will not need its first bailout help. Carol Galante of FHA (acting commissioner) “It would take very significant home price declines to create a situation in which the portfolio would require any additional support. There is no evidence or widespread prediction that home prices are going to decline to the kind of levels” that would require bailout.

The report’s base does not point to the agency collapsing. It is assumed that in the forthcoming months the property market will stabilize followed by increase in prices. In such a scenario the capital ratio of FHA will go up n 2012 to 1% and then to 2% touching the legal goal.

But if this does not happen and the prices drop because of loans that started during the years stretching from 2006 to 2009 the reserves of the agency would be soaked up. The audit feels there will be significant declines in property prices next year. This “would create a situation in which the current portfolio would require additional support” from Treasury. Worst comes to worst, noted the report, if the price declined continued till the end of 2014 the agency would have to be propped up by the Treasury with an extra amount of $43.2 billion. It would not be necessary for the Congress to give the nod to these funds.

The protest against the foreclosure crisis has crystallized into the Occupy New York movement that is now spreading and making those in power uncomfortable. The slogans are too near the truth showing that the protestors understand the game plan so far being played in the name of capitalism – income inequality, unemployment, foreclosures, and obese bonuses rewarding those who managed to pocket ill gotten gains.

The movement kicked off not immediately after the crisis but four years later. Even at the start there was sufficient proof that the system was rotten inside out. By the time the protest started those against whom it was targeted had already captured the government. By selling the argument that if bailouts were not done the system would collapse, they pulled up the elite leaving the majority to drown. It was only when the people realized fully the gigantic trick played out that the Occupy movement kicked off.

The movement is not theoretically questioning the capitalistic system that is founded on private property. What is missing is the notion that the capitalism is characterized by crisis cycles, nagging unemployment and intermittent attacks on property.

There are no contours drawn of a future society. If this is not sketched out then the movement to de-legitimize finance and put in place some sort of justice will soon evaporate as a temporary hiccup.

Nevertheless the significance of Occupy cannot be brushed aside. Although inspired by Arab Spring these movements emerge not in the under or less developed part of the world but in the developed nations. Here it takes place in the advanced urban centres – especially the headquarters of global finance like New York and London.

With the advance of capitalism mass protests have weakened to a great extent because of the unions having lost their previous strength. The numbers of workers under the collective sectors have gone down and there is substantial unemployment creating a pervading sense of fear.

Among other causes was the opening up of cheap labour routes from India and China. The fate of the working class in the developed countries became sealed.

The collapse of the Soviet Union was another big low. In China also a transition took place to socialist market economy that mimed many features of “anarchic” capitalism.

The argument began to gain ground that there was no alternative to this form of capitalism.

Photo by Roger Blackwell

This is not the first time that banks have endured cycles of boom and burst. But banking pundits opine that this time it has been different.

The prime business of banks is lending; it is this that gives them the bulk of their revenue. For many years following the foreclosure crisis lending operations have been low. There are no signs of things improving in the near future although borrowing rates have never been so low.

After being drunk on over-lending for two decades, the consumers have become puritanical. Businesses are shaky about the future and hesitant to expand with loans; they are chugging along on their own steam to survive.

The promise made by the Federal Reserve to keep down the interest rates at the near zero level is gnawing into the profits of banks that it earns on loans and mortgages. Yields from investments are also low. The latter has in general been able to recoup the losses during the fallow periods.

Profits from trading have also been waning during this period of massive slow down. There is little hope that Wall Street will be able to gift back the bonanza of the mortgage packaging business it had reaped during the time of housing boom.

To add insult to injury the financial regulations introduced by Congress in 2010 has resulted in banks increasing numbers of compliance staff as well as risk managers. It involves heavy expenditure. The new rules mandating the keeping of larger reserves will further cut into profits.

These fears are looming large over the banking industry. Although the profits have bounced back from the pit it fell into during the time of the financial crisis, a third of the gains came from shifting capital to the bottom line that had kept aside to recoup losses. It helped to fudge 4.4% fall in revenue that dropped to $188 billion – the level of 2005. Trepp predicts that it would fall an extra 4% to 5% in 2012.

Reacting to this’ the banks are focusing on the zone that is within their control – the costs. They have started plans targeting cuts in operation expenses that had gone by nearly 13% in 2008. Many are transferring workers in the middle and back-offices to cheaper sites. They are taking charge of businesses that had been understaffed – servicing of mortgaging; alternatively they are replacing manpower with computers.