The allegations have percolated for months. In March, The Wall Street Journal reported that Waters, against the advice of Rep. Barney Frank (D-Mass.), the head of the House Financial Services Committee, had boosted the bank and called the Treasury Department on its behalf:

When Rep. Barney Frank was looking to aid a Boston-based lender last fall, the Massachusetts Democrat urged Maxine Waters, a colleague on the House Financial Services Committee, to “stay out of it,” he says. The reason: Ms. Waters, a longtime congresswoman from California, had close ties to the minority-owned institution, OneUnited Bank.

Ms. Waters and her husband have both held financial stakes in the bank. Until recently, her husband was a director. At the same time, Ms. Waters has publicly boosted OneUnited’s executives and criticized its government regulators during congressional hearings. Last fall, she helped secure the bank a meeting with Treasury officials.

When Waters called, her husband no longer sat on OneUnited’s board, but did hold its stock. Waters has vocally supported the minority-owned bank, which got into financial trouble due to its holding of Fannie Mae and Freddie Mac stock. It eventually received funds from the Troubled Asset Relief Program. OneUnited executives have given $12,500 to Waters’s election campaigns, the Wall Street Journal says.

Waters has reportedly elected to go through an ethics trial, like Rep. Charles Rangel (D-N.Y.), rather than accepting the charges. The trial will take place around the time of the midterm elections.

He also tells the Democratic members of the House Financial Services Committee he is picking subcommittee chairs to join him as conferees. That would make the eight Democratic members: Frank and Reps. Carolyn Maloney (N.Y.), Paul Kanjorski (Pa.), Luis Gutierrez (Ill.), Maxine Waters (Calif.), Melvin Watt (N.C.), Dennis Moore (Kans.) and Gregory Meeks (N.Y.).

As for likely Republican conferees: The Republican ranking member is Rep. Spencer Bachus (Ala.), who will be on the committee. The subcommittee ranking members are: Scott Garrett (N.J.), Jeb Hensarling (Texas), Shelley Moore Capito (W.Va.), Ron Paul (Texas), Gary Miller (Calif.) and Judy Biggert (Ill.). The top five members by seniority are Bachus, Mike Castle (Del.), Peter King (N.Y.), Edward Royce (Calif.) and Frank Lucas (Okla.).

Here is the full text of the Frank memo:

I enjoy almost all parts of this job of Chairman, but I have just come up against one that is distinctly not enjoyable: having to pick Members of the Committee to recommend to the Speaker to be Conferees. I appreciate the cooperation that has marked our work together as we have dealt with very difficult legislation, and picking and choosing among the Members, many of whom have told me of their interest in being Conferees, would be impossible to do on any rational basis, and I would hate to engender any resentment to spoil what I think has been a very good working relationship.

I have therefore combined Congressional precedent with my own desire to find a selection method that does not introduce divisiveness into our ranks. I am recommending to the Speaker that we have eight Conferees, because I believe an eight to five ratio between us and the Republicans is optimal, and I am recommending that the eight be myself, the Subcommittee Chairs, and Representative Maloney who was until recently a Subcommittee Chair and vacated it at the Speaker’s request to become Chair of the Joint Economic Committee. This follows seniority in general, although not exactly, but by picking the Subcommittee Chairs — those who are now and have held that position — I believe I have a criterion that does not reflect either badly — or well for that matter — on anyone.

I hope that Members who had wanted to be on the Conference will be somewhat consoled by the fact that I do not intend to preside over a situation in which the Conferees are a very distinct unit. I have asked the excellent staff that serves us to prepare by Wednesday a list of the differences between the bill, and I will take that to a caucus on Thursday to discuss it. It is my intention to have regular caucuses during this period — at least once a week and maybe more if necessary — to get a sense of all the Members on the issues that are before us. It is also the case, of course, that we will not be totally autonomous here. We have an administration that feels strongly about this, and I expect that the House leadership will be engaged more than they were last year when health care took up more of their time and when they paid us the compliment of trusting us. Their greater involvement will not imply a lack of trust, but simply the fact that we are down to a few very important issues where the administration will be strongly expressing its view. There is also the fact that the need to keep sixty votes in the Senate will be something of a constraint, and so, I believe, that we who are conferees will be more the agents of collective decision-making than autonomous deciders.

I am also going to be checking with our Parliamentarian. The rules for Conferences are not in existence in a formal sense, I believe, and I believe I will have the right as Chairman of the Conference to call on other Members to speak on occasion. Obviously that cannot be overdone with the large size of our committee, but it will be possible, I believe, for Members where the matter is particularly important to them for a variety of reasons, to address the Conference at some point.

The lineup is full of heavy hitters, including Treasury Secretary Timothy Geithner, Fed Chairman Ben Bernanke, former Lehman Chief Executive Officer Dick Fuld and Securities and Exchange Commissioner Mary Schapiro. And several of the prepared testimonies are online in advance of the hearing. Most notably, Fuld’s. The former Lehman head makes some rather extraordinary claims.

First, he argues that Lehman was appropriately capitalized before its collapse: “The world still is being told that Lehman had a huge capital hole. It did not. … Using the Examiner’s analysis, as of August 31, 2008 Lehman therefore had a remaining equity base of at least $26 billion. That conclusion is totally inconsistent with the capital hole arguments that were used by many to undermine Lehman’s bid for support on that fateful weekend of September 12, 2008.” But then again, the examiner’s report does state: “The Examiner concludes that there is sufficient evidence to support a finding of undercapitalization of [Lehman Brothers] as of August 29, 2008.” I am not sure how Fuld squares that circle.

Fuld also argues that he had no knowledge of Repo 105: “Let me start by saying that I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. Nor do I have any recollection of seeing documents that related to Repo 105 transactions. The first time I recall ever hearing the term ‘Repo 105′ was a year after the bankruptcy filing, in connection with questions raised by the Examiner.” There is probably no way to know whether Fuld knew about Repo 105 or not — but regardless, it is now abundantly clear that he should have known.

He also argues that, in contravention of the Valukas finding, Repo 105 was acceptable accounting: “As I now understand it, because Lehman’s Repo 105 transactions met the FAS 140 requirements, that accounting rule mandated that those transactions be accounted for as a sale. That was exactly what I believe Lehman did. Lehman should not be criticized for complying with the applicable accounting standards.”

Valukas’ testimony is interesting as well. For one, he goes after Lehman’s regulators, including the SEC and the New York Fed: “We found that the SEC was aware of these excesses and simply acquiesced. With no regulator in place that required Lehman to adhere to its risk limits, … Lehman’s risk limits became meaningless.” He later says, “So the agencies were concerned. They gathered information. They monitored. But no agency regulated.”

• On Tuesday morning, the committee holds a hearing with home loan executives from Bank of America, Citigroup, J.P. Morgan and Wells Fargo on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program.”
• On Wednesday morning, the committee holds a hearing entitled “Housing Finance: What Should the New System Be Able to Do?” The witness list is not yet set.
• On Wednesday afternoon, the Subcommittee on Housing and Community Opportunity holds a hearing on “The Recently Announced Revisions to the Home Affordable Modification Program (HAMP).” The witness list is not yet set.

Some troubling data on the inadequacies of HAMP and the still-weak housing market form a backdrop to the hearings. Today, Bank of America reports that it has completed 33,000 mortgage-modifications, up 12,000 since March — it says it has now modified around a quarter of eligible mortgages. (Citigroup does better: It has modified more than half.)

But those positive statistics are overshadowed by a report from Lender Processing Services — a major mortgage processing company — showing that the inventory of foreclosed homes hit a “record high” in February. The number of delinquencies jumped 21 percent year-on-year. The report notes: “More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.” This graph shows the percentage of mortgages that are non-current or in foreclosure, month by month:

“The time has come,” Rep. Spencer Bachus (R-Ala.) said this week, “to stop pretending we can spend our way out of the recession.”

Enter David M. Walker, the former U.S. comptroller general and now head of the Peter G. Peterson Foundation, which advocates for balanced budgets. Walker — teaming up with Lawrence Mishel, president of the liberal Economic Policy Institute — said this week that a temporary bump in federal spending is the solution to longer-term deficit troubles, rather than part of the problem.

“A focus on jobs now is consistent with addressing our deficit problems ahead,” Walker and Mishel wrote in Politico.

The difficulty is that many politicians and news organizations often cast deficit debates as a dichotomy: You either care about them or you don’t.

But this is rarely accurate. The fact that the two of us, who have philosophical differences on the proper role of government, find much to agree on about deficits is a testament to the importance of dropping this useless dichotomy and finally talking about deficits in a reasonable way.

The reasonable way is first to make the distinction between temporary, emergency spending designed to pull the country out of recession and auto-pilot entitlement spending that’s the true root of the nation’s long-term budget troubles.

The unlikely duo of Walker and Mishel is calling for programs that (1) target job creation specifically, (2) would build jobs quickly, and (3) wouldn’t rely on federal funds in the long run. Infrastructure funding, a hiring tax credit for businesses and an extension of unemployment benefits, they write, all meet these criteria.

The “targeted, timely and temporary” diagnosis is hardly a new one, but its reiteration now — a year after passage of the Democrats’ $787 billion stimulus bill — is good evidence that lawmakers didn’t focus enough on those parameters the first time around (as many economists have indicated).

Will lawmakers learn the lessons of the last year? Not probable in an election year when voter anger, more than economic necessity, seems likely to dictate what Congress can do.

The story describes four Wall Street lobbyists meeting for breakfast at Tortilla Coast restaurant on Capitol Hill with about a dozen (unnamed) fiscally conservative House Democrats in early December. The discussion became heated, and the lobbyists were told banks should do more to increase lending and to aid struggling homeowners.

But that’s not what happened in the end. Instead, firms that helped cause the worst financial crisis in 70 years used their energy to to stave off reforms, sidestepping proposals that would have split investment and commercial banking, capped pay or seriously hurt their ability to make money, Bloomberg reports. And 27 Democrats aided their efforts by voting against any reforms at all.

“The industry is not losing as badly as it thought it might,” said Oliver Ireland, a former associate general counsel at the Federal Reserve and now a partner at law firm Morrison & Foerster in Washington. “The fact that someone had a worse proposal on the table and it doesn’t happen — it’s hard to view that as a win. It’s not as big a loss.”

The piece also examines  how pro-business New Democrats held up the reform bill to force consideration of a bank-friendly amendment from Rep. Melissa Bean (D-Ill.), that would give federal regulators greater powers to override state regulations.

Instead of starting debate on legislation that was six months in the making, House Financial Services Committee Chairman Barney Frank, House Majority Leader Steny Hoyer and House Rules Committee Chairwoman Louise Slaughter marched into a meeting in the offices of Speaker Nancy Pelosi on the second floor of the U.S. Capitol.

Frank, who introduced the financial overhaul legislation, and other House leaders were in one room, while Bean and Treasury officials were in another. Hoyer shuttled back and forth, according to a person familiar with the matter.

An hour later, shortly after 6 p.m., Frank emerged from the meeting and told reporters a deal had been reached. A version of Bean’s proposal would be included in the bill.

“The differences have been narrowed, and I think you’re getting something that both sides can live with,” said Frank, a Massachusetts Democrat.

Debate on the bill began at 6:49 p.m.

“Some of the big banks had a successful run at lobbying the New Democrats,” including on the preemption issue, Frank said in a Dec. 10 interview.

That’s putting it mildly. The story doesn’t explain why Treasury officials were in the room with Bean — that’s a particularly interesting detail that the public might want to know about. Anyway, all of this explains how banks fared far better than they thought in the House bill, and there’s still a fight in the Senate to come.

Given what’s happened so far, banks clearly could win again, simply by chipping away at reforms until they end up with something that’s not nearly as bad as they once feared. One of the lobbyists even told Bloomberg the financial industry was benefiting from the fight over health care reform, because it has slowed down regulatory legislation.

That banks are making any headway “is astonishing,” said Travis Plunkett, legislative director at the Washington-based Consumer Federation of America.

“Some members of Congress seem to have memory loss,” Plunkett said. “They are forgetting that the very institutions whose amendments they’re proposing were the entities that helped cause our nation’s financial collapse. The banks are playing death by 1,000 cuts.”

And by some measures, they’re not losing, which adds up to a win.

Julio Angulo was evicted from his Virginia home last December. (American News Project)

It was last December when Julio Angulo ignored the bitter cold and sat on a rusted patio chair in the front yard of his foreclosed home in suburban Manassas, Va. He sighed, resting his hand on his knee. He stared despondently at the sky. His lender had foreclosed on his house in July. He had just been evicted.

[Economy1]Angulo, then 55 years old, had nowhere to go. His wife and two children already had returned to El Salvador. He had refused during the summer to accept a cash-for-keys transaction, in which he could turn the house over to the lender in exchange for a cash payment. Instead, he remained, alone, in the three bedroom townhouse, in a modest working-class neighborhood called Georgetown South, until a Prince William County Sheriff’s Deputy knocked on the door on Dec. 1, 2008 for the foreclosure eviction.

A house painter, Angulo couldn’t afford the market rents of $1,500 a month for apartments elsewhere in the neighborhood. Most of Prince William County’s shelters also were full that day.

A year later, Angulo is gone. A legal resident of the United States, he joined his family in his native El Salvador, to let a knee injury heal, and to recover from his lost dream of owning a home. With nowhere to go immediately after the eviction, he luckily ran into a neighbor that night who offered to rent him a room for two weeks. He went to a public health clinic, to see a doctor about the arthritis in his injured knee. Then he left for El Salvador.

The house he paid $280,000 for in July of 2005 sold for $69,900 on March 16, 2009, according to local real estate agent Keith Elliott Jr. Real estate investors bought it.

And a year later, the hopes of those who thought the government could come up with a plan to stop foreclosures and help keep people like Angulo in their houses seem in tatters as well.  The Obama administration’s signature effort remains its $75 billion Making Home Affordable program, which was set up to aid as many as 4 million homeowners. But Making Home Affordable has in most ways been a crushing disappointment, housing advocates say.

At the beginning of this year lenders on their own were doing far more permanent loan modifications than the government has been able to accomplish since rolling out its program in April, noted Diane Thompson, an attorney with the National Consumer Law Center. Private lenders were completing 120,000 permanent loan modifications per month during the first quarter of this year. Under the Obama administration’s initiative, some 650,000 homeowners have entered into trial loan modifications, but only about 10,000 permanent loan modifications had been completed by the end of October, a Congressional oversight panel reported on Wednesday. Treasury Department figures released Thursday showed that only 31,382 permanent loan modifications had been completed under the government program as of Nov. 30.

Making Home Affordable’s loan modification effort is known as HAMP, or the Home Affordable Modification Program. The small number of permanent loan modifications so far is due in part to a new program getting established, and to the fact that borrowers in the government program have to complete three-month temporary trial loan modifications first, in order to qualify for permanent ones. Getting the permanent trial modification isn’t automatic — trial program borrowers must submit paperwork documenting their incomes to convert to permanent loan modifications, and they must make three months of payments under their trial agreements.

Treasury expects some 375,000 trial modifications to be finished by the end of this year, but it’s not clear how many will become permanent. Updated numbers are expected this week. But none of this fully explains the glaring lack of progress so far, Thompson said.

“We’re more than nine months into the program, and trial modifications account for only about 11 percent of all the seriously delinquent loans, and permanent modifications aren’t even on the radar screen,” Thompson said. “The HAMP servicer participation agreements do not provide for any penalties, other than termination from the program, for the failure to make modifications.  Until those agreements are revised, the administration has little recourse other than public shame to compel servicers to make loan modifications. Meanwhile, the number of homes seriously delinquent and in foreclosure continues to rise every quarter.”

This is hardly what Thompson expected, just a year ago.

“It’s been very distressing,” she said.

In testimony submitted to the House Financial Services Committee on Tuesday, officials from JP Morgan Chase reported that of every 100 homeowners who sought to have their loans reworked under the government’s program, just 15 have or will end up with, a permanent loan modification.

Thompson and others who follow loan modifications said they were aware from the beginning that the government program couldn’t prevent all foreclosures, especially as job losses mounted and even prime borrowers fell behind on their payments. Experts also knew there would be some slowdown under the administration’s new program, as servicers worked to convert temporary loan modifications into permanent ones.

Servicers and borrowers are pointing the finger at each other over the lack of more permanent loan modifications. Servicers contend borrowers aren’t coming up with the necessary paperwork, such as documenting their incomes, that is required for permanent loan modifications. But housing counselors say just the opposite — that borrowers supply servicers with pay stubs and other paperwork, only to have their servicers lose them, or sit on them so long they aren’t current.

Thompson said there are even bigger problems with the program that leave her feeling very differently about the effort today, compared to her optimism when it was first announced.

“I don’t yet see any of the work on HAMP by the administration addressing the core problems in the program–a lack of accountability and transparency–so I am not optimistic, although I do believe that some of the incremental changes to the program are helpful and may help tens of thousands of people,” she said. “The problem is that we need to help millions, not tens of thousands.”

Alan White, a Valparaiso University law professor who studies loan modifications, was even more blunt:

“If we don’t see more permanent mods soon,” he said, “it will look like the HAMP program is a failure. We’ve seen a net reduction in permanent loan modifications. That’s not good.”

The failure to get more permanent loan modifications done “should be considered a breach of contract” by servicers and lenders that have accepted taxpayer bailout money and are eligible for financial incentives from the government for reworking loans, White said.

He and others never expected things to end up like this. In November 2008, mortgage giants Fannie Mae and Freddie Mac announced a foreclosure moratorium for the holidays, beginning in Thanksgiving, to allow the government to work out the details of streamlined loan modification efforts. Hopes were high that many borrowers would stay in their homes.

In Angulo’s case, the help was too late. He was evicted regardless, because the policy applied only to new foreclosures, not those already in the pipeline.
Fannie Mae announced last month a new policy to allow qualified owners facing foreclosure to rent back their homes for as long as a year. But Angulo most likely would not have qualified for that help, either, had it been available a year ago, since he couldn’t afford market rents in the area, a requirement of the program.

Angulo had covered his mortgage by renting out some of the bedrooms. In the spring of 2008, his renters left and the monthly payment on his adjustable rate mortgage also jumped from $1,400 to $2,600. As a house painter, he earned $500 a week.

Angulo said at the time that he tried to contact his lender, Aurora Loan Services, a subsidiary of Lehman Bros. that specialized in Alt-A and interest-only loans. But the servicer wouldn’t help him, he said.

Since his eviction, his old neighborhood isn’t the only location were housing values have fallen. In November, Zillow, an online real estate service, reported that year over year housing values nationwide had declined for the 11th consecutive quarter.

In Georgetown South, since last December, the highest priced home that has been sold went for $120,000, and it most likely resulted from an investor flip, Elliott said. In Prince William County overall, the first-time homebuyer tax credit helped boost sales of bank-owned foreclosed properties – but that doesn’t mean the local housing market has recovered, he said.

“Banks are probably planning on trickling out these additional foreclosures slowly while the market continues to improve,” he said. “How big is the shadow market? Honestly, I think it’s anybody’s guess. The banks could be sitting on a whole bunch just waiting to trickle them out a few at a time.”

As neighborhoods like Georgetown South continue to absorb the effects of a collapsed housing market, NCLC’s Thompson noted that growing foreclosures are spreading damage throughout the economy, hurting neighborhood property values, and cutting into state and local tax revenues.

That’s why Julio Angulo’s story is much more than just the eviction of another former homeowner on a cold December day, a year ago.

“This isn’t just about homeowners who need help,” Thompson said. “Unless officials take forceful action on foreclosures, things will only get worse. I never thought, at this point, that foreclosures still would not be effectively addressed by the administration. If we don’t get foreclosures under control, and soon, they’re going to drag down the whole economy.”

Angulo, for his part, promised to call if he ever could make his way back to Virginia, to try again to find work, and to buy another home.

He hasn’t been heard from since he left.

This article was to include new Treasury Department loan modification figures released Thursday.

Read Mary Kane’s December 2008 article about Julio Angulo’s eviction here.

The Washington Post reports Housing and Urban Development Secretary Shaun Donovan will tell the House Financial Services Committee that the agency wants to increase the up-front cash paid by borrowers,  raise minimum credit scores for borrowers, and limit how much money sellers can kick in, including paying closing costs or giving free upgrades.

The proposals for tighter standards come as the FHA handles a much larger share of the mortgage market than in the past, and more of its loans go bad. As we explained, FHA loan volume has quadrupled since 2006, and a rising number of defaults has prompted fears the agency will be the next in line for a government bailout.

From The Post:

In the past, the FHA has resisted raising down payments or insurance premiums for fear of shutting out qualified borrowers and stunting the housing market’s slow but steady recovery.

But Donovan plans to tell the House committee that the exploding volume of loans the FHA is now handling requires stricter risk controls than the previous administration had in place, according to a copy of his prepared testimony. A recent audit shows that the FHA’s financial cushion already has eroded below the level required by law.

It’s important to connect the dots here, from mortgage fraud schemes to the FHA. Investors that commit mortgage fraud while flipping short sales or through other schemes increasingly have been finding ways to fund their deals through the FHA, as we noted. In some cases, they have been evading FHA anti-flipping rules by setting up land trusts to purchase and hold real estate, and to obscure the identity of the actual purchaser.

As Yves Smith at Naked Capitalism explained, the FHA has been put in a difficult position as a result of the financial crisis:

It is really a shame to see what has happened to the FHA. Prior to the subprime bubble, the FHA has a good record with providing low down payment loans to borrowers. Before readers scoff, it had a simple secret: it screened borrowers. And the old-fashioned process was sufficiently time-consuming that the prospective homeowners also had to grapple with whether they could make the payments…But now the FHA has been assigned a role in the “save the housing market” game plan, which means notions of prudence get compromised.

But it’s even more than that. As we reported nearly a year ago, both the FHA and HUD were mostly ignored during the Bush administration — but now are being called on to turn on a dime and play major roles in saving the mortgage and housing markets.

The FHA must turn itself around and operate at its peak, after years of neglect. While the Obama administration tackles the stimulus plan and other urgent problems, government agencies like FHA and HUD, long relegated to the sidelines, are being called on to ramp themselves up and take on greatly expanded tasks. With the financial crisis so severe, the revitalization has to happen immediately – and there’s no Plan B. Getting these agencies back up to speed is an overlooked challenge facing the new White House regime.

Rising fraud in FHA loans is one example of that challenge. The new rules are a step toward addressing the problem. But the administration also needs to make a top priority of providing the FHA with the resources to put in place additional risk controls and other necessary changes to handle its much larger role. Banks that aren’t lending have gotten most of the government’s attention and money, even as rising fraud in FHA loans is threatening the housing market, and the economy, as a whole. It’s long past time to change that.

Yesterday, industry representatives held a conference call with reporters boasting about just how effective they’re fight against the proposed reforms has been. Washington Post columnist Dan Milbank today captures the essence of the industry’s reasoning:

[T]he argument most likely to prevail for the financial firms on Capitol Hill was offered by Chris Stinebert, [head of the American Financial Services Association]. “Especially now, when we’re in a very, very sensitive time, when the capital markets are just starting to recover,” he said, “introducing a high level of uncertainty in the marketplace could be very detrimental.”

Most of America, though, will have a tough time sympathizing with the alleged misfortunes of Wall Street firms, some of which are posting record profits at the same time that unemployment continues to leap.

With that in mind, Milbank offers his translation of Stineberts argument:

[T]o put it another way: Don’t regulate us now because the economy is still suffering from the mess we made because we weren’t regulated the last time. Chutzpah, it appears, is recession-proof.

This week, Rep. Barney Frank (D-Mass.), the House Financial Services chairman whose systemic-risk legislation includes the after-the-fact fees urged by Geithner, says he’s now leaning toward the Bair plan. Indeed, The Wall Street Journal reports today that “a Frank aide on Friday said he now favors amending the measure to create a prepaid fund.”

There will be plenty of time to make the changes. Frank’s committee will meet tomorrow to begin marking up the bill, with debate on amendments not expected until Thursday, the Journal reports. No doubt some lawmakers are drooling at the chance to tweak the bill.