Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses: They created fake demand.

A ProPublica analysis shows for the first time the extent to which banks — primarily Merrill Lynch, but also Citigroup, UBS and others — bought their own products and cranked up an assembly line that otherwise should have flagged.

The products they were buying and selling were at the heart of the 2008 meltdown — collections of mortgage bonds known as collateralized debt obligations, or CDOs. As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created — and ultimately provided most of the money for — new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those.

The biggest offender? Not Bear Sterns or Lehman Brothers, but Merrill Lynch, now part of Bank of America.

Just before the financial crisis and credit crunch, it originated 31 collateralized debt obligation deals and ended up purchasing parts of 13 of them, for instance.

• Barbara J. Desoer, president of Bank of America Home Loans
• Ingrid Gould Ellen, professor of urban planning and public policy at New York University’s Wagner Graduate School of Public Service
• Bill Gross, co-founder and co-chief investment officer of PIMCO
• Mike Heid, co-president of Wells Fargo Home Mortgage
• S.A. Ibrahim, chief executive officer of Radian Group
• Marc H. Morial, president of the National Urban League
• Alex Pollock, fellow at the American Enterprise Institute
• Lewis Ranieri, chairman of Ranieri and Co.
• Ellen Seidman, executive vice president of ShoreBank Corp. and chair of the board at the Center for Financial Services Innovation
• Michael A. Stegman, director of policy for the Program on Human and Community Development of the John D. and Catherine T. MacArthur Foundation
• Susan Wachter, professor of financial management, real estate and regional planning at the University of Pennsylvania’s Wharton School
• Mark Zandi, chief economist of Moody’s Analytics

Affordable housing advocates criticized the list and argued against their exclusion, Zach Goldfarb at The Washington Post reports:

“Apparently being a community organizer qualifies you to be president, but it’s not good enough to be part of HUD and Treasury’s think tank on housing,” said NCRC chief executive John Taylor, whose group works with hundreds of community organizations to promote access to financial services for low- and middle-income people.

The criticism by affordable-housing advocates was notable because the Obama administration has so far paid much more attention to their concerns than previous administrations have. Advocates, for instance, had credited the administration with listening to community groups that argued that the government must do more to embrace rental housing for those who cannot afford to buy a home.

A foreclosed home in Winchester, Va. (Jay Mallin/ZUMA Press)

Black homeowners are roughly 50 percent less likely than whites to receive help under the largest of the administration’s anti-foreclosure programs, according to a new survey of qualified families.

The findings have raised questions on Capitol Hill about the fairness of the program, led housing advocates to reiterate calls for a more aggressive foreclosure prevention initiative, and put the White House on the defensive just as it steps up its multi-pronged strategy to stabilize the troubled housing market.

[Economy1] Launched by the Obama administration 13 months ago, the $75 billion Home Affordable Modification Program provides financial incentives to mortgage lenders and servicers who agree to reduce monthly payments for struggling homeowners. Candidates for the program must live in the home in question, and their mortgage payments must exceed 31 percent of the family’s income. The program, designed to reach between 3 million and 4 million homeowners by 2012, has led to roughly 116,000 permanent modifications thus far.

Yet just 24 percent of black respondents eligible for mortgage modifications under the HAMP have received one, according to a survey conducted over the last two months by the National Community Reinvestment Coalition, an advocacy group. By contrast, roughly 36 percent of HAMP-eligible whites benefited from a modification under the program. That disparity, NCRC President John Taylor said last week, should compel the White House to take a closer look at the participating banks to ensure that they’re complying with the nation’s fairness-in-lending laws.

“Not only is the program really just not making the dent in the [foreclosure] problem,” Taylor told lawmakers on the House Oversight Committee on Thursday, “it’s not really being administered in a way that’s fair across the board.”

It didn’t take long for committee members to take notice, particularly those in the Congressional Black Caucus. At the Thursday hearing, Reps. Danny Davis (D-Ill.) and Elijah Cummings (D-Md.) were quick to press White House officials about their efforts to close the gap. Rep. Diane Watson (D-Calif.) blasted the subprime lenders who targeted minority communities for using tactics “bordering on the illegal.” And Rep. William Lacy Clay (D-Mo.) accused the mortgage lending industry of “racial insensitivity.” Clay wondered out loud what the administration is doing to repair what he called the “wanton, onward aggression that was displayed towards a class of people.”

“It’s going to take some aggressive actions on the part of the Treasury to really crack down on these abuses and eliminate [them] from the marketplace,” Clay said.

Government officials have long acknowledged that minorities were targeted by subprime lenders as the housing bubble inflated over the last decade. And that trend shines through in the NCRC survey. Indeed, although black respondents to the survey claimed higher income levels than their white counterparts, 47 percent of them said that problematic loan terms were a factor in their difficulties making monthly payments, versus 26 percent for white respondents.

It’s no coincidence, then, that those same borrowers are having the toughest time getting mortgage modifications under the HAMP, experts say.

“They started out with disproportionately bad loans,” Gene Dodaro, who heads the Government Accountability Office, told lawmakers Thursday. “They’re starting with just a more difficult problem in terms of having to modify those loans.”

Herbert Allison, Jr., the Treasury official charged with monitoring the HAMP, echoed that message. Acknowledging the “widespread predatory lending practices” in recent years, Allison vowed to “take action” if officials “find any type of discrimination” among lenders and servicers participating in the program. The administration, he said, is compiling race- and gender-specific data surrounding the HAMP, to be published “as soon as we have enough statistically valid data.” The target date for that release, he added, is June.

“If it’s found that … people did not get a modification who deserved one under our rules, we go back and rectify that,” Allison said.

But there’s another reason that blacks are likely benefiting less than others from the HAMP: They’re losing their jobs at a faster clip. While the nation’s unemployment rate was 9.7 percent in February, that figure jumps to 15.8 percent for black workers, according to the Labor Department. And no amount of mortgage reduction will help those without an income.

“The HAMP program does not really help you if you’ve lost your job,” Mark Calabria, a financial expert at the conservative Cato Institute, testified last week. “[There is] absolutely no way we can address the foreclosure situation without addressing the jobs situation.”

There’s good indication that the administration is catching on. Indeed, the White House last week launched a program that provides financial incentives for banks to write down principal balances, rather than reducing payments by simply altering interest rates. More important for the unemployed, the program also puts a three- to six-month moratorium on foreclosures for homeowners who have been laid off.

On Monday, the administration announced $600 million in emergency housing aid for high-unemployment states. That move follows the arrival of a similar program that allocates $1.5 billion to states where home values dropped more than 20 percent amid the recession.

Housing advocates have applauded those changes every step of the way. Many, however, contend that no program relying on the voluntary compliance of the banks — which can often profit more from a foreclosure than a modification — will ever be as successful as a program that forces the lenders to participate.

“We now know it’s really not working, and the fundamental reason it’s not working is because it is voluntary,” Taylor, of the NCRC, said of the HAMP. “It’s not that the program design is bad. It’s that participation is bad.”

An ambitious plan to update the Carter-era Community Reinvestment Act that supporters hope to see signed into law in 2010 comes amid charges that this legislation was responsible for nothing less than the subprime crisis and the resulting collapse of the residential real estate market.

The plan, sponsored by Rep. Eddie Johnson (D-Tex.), would close some loopholes in the original act that let non-bank financial firms operate with relative impunity. It would levy negative ratings on a much wider array of institutions that practiced predatory or discriminatory lending, and it would require that non-bank entities like mortgage providers and insurance companies comply with all CRA tenets.

[Economy1] Why this piece of legislation is still such a lightning rod more than 30 years after its introduction is something both its supporters and detractors struggle to explain from their respective camps. “The idea that this was just some sort of carrot-stick regulation that didn’t work is a perception that goes very much in hand with a right-wing agenda,” said Jose Garcia, associate director for research and policy at advocacy group Demos. Demos is one of several progressive groups seeking to have the bill, the Community Reinvestment Modernization Act of 2009, made into law.

On the other hand, Mark Calabria, director of financial regulation studies at the Cato Institute, asserts that political pressure drives CRA support. “It fundamentally gets to some very emotional issues. [Supporters] see this as an issue of racism and social justice,” he said. The Cato Institute held a forum in November that was broadly critical of the CRA, asserting that the financial models at its core are faulty.

Federal Reserve chairman Benjamin Bernanke called the CRA a “catalyst” in 2007, although he touched on the trouble already brewing in the subprime mortgage sector as an imperative to revisit the Act in the wake of significant changes in the banking industry since its implementation.

At its heart, the CRA was created to try and legislate out some of the institutional discrimination in the financial services industry. It was conceived in a very different era from today’s world of global banking behemoths. In the wake of the civil rights movement, most banks were still small, often single-branch operations. Many would operate selectively in low-income and minority neighborhoods, accepting the deposits of local residents but only writing home or business loans in more affluent communities.

Regulatory changes in banking plus an agenda embraced by Fannie Mae and Freddie Mac to boost homeownership cracked the mortgage market wide open beginning in the 1990s, and the CRA was initially credited with higher rates of homeownership among low-income and minority Americans. According to Kathleen Day, spokesperson for the Center for Responsible Lending, “The purpose of the CRA is to go into underserved areas and look for credit-worthy borrowers you overlooked because of red-lining,” she said, referring to the bank practice of categorically refusing to lend in certain neighborhoods.

The result of reckless lending practices is by now apparent to everyone, although concerns were swept under the rug in the go-go years of the mid 2000s. CRA supporters say brokers and non-bank mortgage outfits wrote nearly 95 percent of the bad loans, while the Act took the fall when these loans turned out to be unsustainable.

“Nine out of 10 of the people who got bad loans already had homes,” said the Center’s Day. “Six out of the 10 were refinances and three were selling one home and buying another.”

Often, Day adds, the unscrupulous vendors that preyed on subprime mortgage candidates cloaked their malfeasance in the language of the CRA’s mission, a sleight of hand that muddied the waters and assigned undue blame on the regulation when mortgages — and the huge numbers of securities backed by them — began to sour.

Even Lawrence White, a New York University who wants to see the CRA scrapped, says it’s not to blame for the financial meltdown. “The CRA has very little to do with the subprime lending debacle,” he said.

Aside from mortgage lending, the other goal of the CRA is to provide basic banking services to low-income and minority citizens. In these locations, “Pawnshops and the like literally became the banking services,” said John Taylor, president and CEO of the National Community Reinvestment Coalition, the organization spearheading the modernization of the CRA.

“In some communities there are no financial institutions,” asserted Demos’s Jose Garcia. Geographic impediments and language barriers create a two-tier system that leaves low-income Americans, minorities and immigrants without access to the banking and lending services the middle class takes for granted.

If the legislation were better-enforced — something the NCRC’s Taylor believes the modernization bill would facilitate — banks wouldn’t be able to do things like close branches in these communities without repercussions. But preventing closures would just be the beginning.

In a 12-page statement, the NCRC spelled out major features of modernization. Key among them are inclusion of non-bank financial firms under the umbrella of CRA oversight, and a greater emphasis on the neighborhoods in which institutions write loans, not just the locations where their branches or offices are located. This is partially due to the rise of online and branchless financial institutions, but Taylor says the switch will also prevent companies like subprime mortgage-peddlers from operating under the radar.

Advocates also want to see enforcement of the CRA transferred to the not-yet-created Consumer Financial Protection Agency. The CFPA, as its supporters envision it, would consolidate regulatory oversight and enforcement of banking and lending activities in a single agency, rather than the patchwork of regulators some say let ruinous business practices slip through the cracks.

The modernization effort isn’t without roadblocks, though. The current House bill has yet to progress to the Senate, although Taylor says the NCRC’s goal is to have the modernization signed into law sometime this year. The CFPA doesn’t even exist yet, and might never come to fruition. Last week, Senate Banking Committee Chair Christopher Dodd (D-Conn.), the lawmaker who has championed the idea, indicated he may be willing to abandon the idea of a consumer protection agency.

In the end, it’s not clear what is ahead for the CRA. Some, like the Cato Institute’s Mark Calabria, think the need has run its course. “There was a logical raison d’être for the creation of the CRA at the time but that justification is no longer there,” he said. He admits that an outright repeal of the Act is unlikely, though. NYU’s Lawrence White also wants to get rid of the CRA, although he wants to replace it with a cap-and-trade system of credits similar to the protocol used to eliminate acid rain-causing sulfur dioxide in the 1980s.

Progressive and social-justice groups say that the CRA, while not perfect, needs to be improved, not thrown out. “We’re talking about trillions of dollars of private resources that could be available to low- and moderate-income neighborhoods,” said the NCRC’s Taylor. “We believe in banks. If we don’t have them active in these neighborhoods, it’s very unlikely they’re going to prosper. We want banks to see these neighborhoods as an important part of the economic future of this country and of their business plans.”

In the end, it might come down to that. If the notoriously profit-hungry banking industry sees economic potential in lower-income areas, this would go a long way towards keeping the predatory players out of the arena.

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.

JumpStart Executive Director Laura Levine and Southeast Regional Director William Cheeks (jumpstartcoalition.org)

The JumpStart Coalition for Personal Financial Literacy, a national nonprofit advocacy group that aims to improve the financial management skills of America’s youth, draws lots of attention for its surveys measuring how much kids really understand money. Last spring, Federal Reserve Chairman Ben Bernanke even led a joint news conference to announce JumpStart’s most recent findings, calling it “a leader among organizations seeking to improve the personal financial literacy of students from kindergarten to the university level.”

The 180 corporations, government agencies and nonprofits that are partners and provide financial support to the coalition get prominent billing on JumpStart’s Website, and share in the prestige of a group that promotes national standards for financial literacy education in the country’s classrooms.

But also included in the coalition is CompuCredit, an Atlanta subprime lender that specializes in high-rate credit cards, payday loans, auto financing and debt collection, focusing on customers with poor credit scores. In December of last year, CompuCredit reached a $114 million settlement with the Federal Deposit Insurance Corporation and the Federal Trade Commission, which had charged CompuCredit and two partner banks with deceiving hundreds of thousands of customers by failing to properly disclose upfront fees and credit limits on their cards, thereby sinking borrowers further in debt. In addition, JumpStart’s Southeast regional director, a paid consultant who serves as a liaison to the group’s state affiliates, also counts CompuCredit as a client of his private consulting firm.

JumpStart executive director Laura Levine said that she was aware that CompuCredit belongs to JumpStart’s coalition, and that the coalition’s Southeast Regional Director William Cheeks also works for CompuCredit as a consultant. But, she said, no questions had been raised about the situation until an inquiry from TWI. Levine said JumpStart staff would explore the matter.

“No one’s called it to our attention as a problem,” Levine said. “Now that we’ve talked about it we will look into it further.”

JumpStart is not taxpayer-funded, although government agencies like the FDIC and Freddie Mac are partners. Corporate partners pay $5,000 annual dues to the coalition, with lesser fees for government groups and nonprofits. Membership has to be accepted by the board of directors, Levine said. Businesses that only do payday loans would never be approved for membership, she said, but the situation “gets into a real grey area” when a company, like CompuCredit, offers a range of financial products.

JumpStart describes its mission as promoting financial literacy through advocacy, research, standards for financial literacy education, and educational resources.

It also maintains an online clearinghouse of approved personal finance materials for educational use. Its partners provide financial support, and JumpStart in turn offers guidance and resources to help member organizations with their own financial literacy efforts. It does not allow any coalition members to sell or distribute their own products through JumpStart.

Regarding Cheeks, Levine noted that he is a consultant, not an employee, and that JumpStart can’t dictate what clients his private firm might accept. “We’re a coalition of organizations and entities that share a commitment to financial literacy education,” Levine said. “We have a lot of financial services firms that may be competitors, or may have different positions from each other. They aren’t working for us. They came to JumpStart to share in our support of financial education and financial literacy efforts.”

But Irene Leech, president of the Virginia Citizens Consumer Council, said she found CompuCredit’s involvement with JumpStart troubling.

“I’m disappointed,” said Leech, who also specializes in consumer issues as a Virginia Tech professor. “It’s distasteful, and it doesn’t improve its efforts. I would have absolutely said no to both these situations, at a bare minimum. I have a pretty high expectation for a group like this. There are many professional and academic organizations that I belong to that are members, along with the consumer groups. They’re the entity that everyone is looking to when it comes to measuring financial literacy with a high degree of accuracy.”

Leech added that “I just wouldn’t have thought that their leadership would have wanted to go this way. I’m really sad they’ve gone this route.”

In Virginia, JumpStart’s state coalition was credited with helping require financial literacy education in school curriculums, and also is active in other states to promote financial literacy at a local level, Leech said. Next month, JumpStart will sponsor its first national educator conference for K-12 teachers, devoted specifically to personal finance education. FDIC Chair Sheila Bair is scheduled as the keynote speaker.

At last spring’s joint news conference, Bernanke said the regional Federal Reserve banks work closely with JumpStart state coalitions on financial literacy issues. And JumpStart is probably most well-known for its biennial financial literacy surveys, which usually receive wide press attention. The April 2008 survey found that graduating high school seniors still were struggling with financial literacy basics.

Regarding the coalition partners, Levine said that “Many of our partners conduct financial education or support financial education activities–JumpStart’s role is to support, in some ways, what the partners do. For example, if a partner has a financial education product, we list it in our clearinghouse to try to help users find it. So, we don’t specifically ask them to do things for us.  We ask them to base their materials on the national standards, to help advance the
mission of the coalition.”

“We generally recommend their participation in financial literacy activities and efforts,” Levine continued, “but we don’t specifically ask them to do things.  Partners support us financially for the effort that we do, generally, on behalf of all, such as publication of the standards, operation of the clearinghouse, (and) promoting Financial Literacy Month.”

Leech said JumpStart has been very successful, particularly at the state level, in getting more businesses to join the coalition. But while partners from Merrill Lynch to Experian sponsor JumpStart surveys, conferences and other activities, CompuCredit should be treated as a different case, she said. Subprime lenders often seek to align themselves with more mainstream organizations to deflect controversy over their practices, Leech noted. CompuCredit’s membership in the JumpStart coalition reminds her of businesses that create fake consumer groups with benign-sounding names as cover, she said, and there should be no grey area in determining whether the firm belongs in JumpStart.

“I’m not buying any of it. We all know that folks are being taken advantage of” by subprime firms and payday lenders, Leech said.

For his part, Cheeks, president of a Georgia fiscal management consulting firm, described himself as a retired Equifax executive whose main goal is consumer education. As to whether any conflict of interest exists by consulting for both JumpStart and CompuCredit, Cheeks said that “I consult with a lot of companies” and added, “I’m not going to get into that discussion.”

“I work to help consumers understand credit – how credit works, how to improve their credit,” said Cheeks, a former Vice President for Consumer Education at Equifax. “I do that for all of my clients. I am a consumer educator. That is exactly what I do. With JumpStart, my focus is kids. I want to get to students as early in life as a possible, so they can build a good credit history.”

He declined further comment regarding CompuCredit.

Guy Cecala, publisher of Inside Mortgage Finance, which covers the subprime industry, said subprime lenders like CompuCredit usually have a problem when it comes to supporting financial literacy, since some basic lessons would be not to take out payday loans or to pile up debt on high-rate credit cards.

The FDIC, for example, said its charges against CompuCredit stemmed from a fee-based credit card marketed to consumers with low credit. The FDIC said the solicitations “failed to adequately disclose significant upfront fees and misrepresented the consumer’s initial available credit. The solicitations appeared to offer credit cards with a $300 credit limit; however, consumers were immediately charged as much as $185 in inadequately disclosed fees, leaving them with as little as $115 in available credit.”

CompuCredit did not admit or deny liability in the settlement of the charges. A company spokesman did not respond for comment.

Subprime lenders have been reinventing themselves since the mortgage crisis hit, turning to conducting mortgage loan modifications or offering foreclosure counseling, Cecala said. CompuCredit’s affiliation with JumpStart fits that mold, he said.

On its Website, CompuCredit says it provides a “much needed second chance” to consumers overlooked by traditional financial institutions. It also lists financial literacy among its philanthropic activities. The company also features a “financial wellness” section, which includes a financial literacy guide for consumers.

Levine said Cheeks has been a consultant for Jumpstart for about five years. CompuCredit has been a coalition partner since at least 2007, she said.

CompuCredit has been involved in controversy over its financial literacy efforts before. The Southern Christian Leadership Conference drew criticism for entering into a 2007 partnership with CompuCredit, with plans for joint “economic empowerment” workshops aimed at educating minorities borrowers about credit, and a co-branded credit card.

“It’s a concern for the same reason the subprime lending problem should have been a concern five years ago,” said Geoff Smith, vice president at the Woodstock Institute. “There are certain communities that are more at risk, but if it goes unchecked … it has the potential to spiral and affect all parts of the economy.”

It’s certainly gone unchecked so far.

On stretches of Chicago’s North Side, they call some neighborhoods “condo ghost towns” now, because so many of those new developments are vacant. Neighborhoods that used to be considered trendy and on the way up are headed in reverse, blighted by vacancies and decline. This isn’t going away anytime soon. Washington may not see it yet, but people who live there are well aware that it’s going to take a very long time to rebound from this mess.

From American Banker:

Though the banking industry has opposed such a bill for two years, lawmakers have agreed to narrow the scope of the legislation to win industry support. So far, Citigroup Inc has indicated it would back the compromise. At a press conference this afternoon, lawmakers are expected to unveil a bill that would only apply to nontraditional loans originated before the law’s enactment date. The legislation would also require that borrowers made good-faith efforts to work with their lenders to rework their mortgages before initiating the bankruptcy process. Lenders who violated the Truth in lending Act would also waive certain priority creditor rights afforded under bankruptcy protection.

American Banker’s sources said Citigroup approached Sen. Charles Schumer, D-NY, with the possible compromise in December. The bank, the recipient of government bailout money, feared a tougher version would be enacted in a new Obama administration. Negotiations are ongoing, according to American Banker:

Citigroup’s negotiations continued this week with Sen. Richard Durbin, D-Ill., the primary Senate sponsor of the mortgage bankruptcy bill, and Senate Banking Committee Chairman Chris Dodd, who has been a vocal advocate of the legislation. “The senator has been in touch with Citi since last year and as recent as this week and is working together with Dodd and Durbin to try to make this happen,” said an aide to Sen. Schumer. It’s unclear how quickly the legislation could move — or whether other banks will sign on to the Citi deal. Sen. Schumer said in a statement he wants to attach the bill to the economic stimulus package.

Also there’s no word yet from housing advocates as to whether they’ll support the compromise. Still, considering the idea never had a chance of seeing daylight for the past eight years, any progress is better than nothing. The fact that banks and lawmakers are even tackling this also suggest how severe the foreclosure crisis has become.

Tanta also often taught the mainstream media a lesson, calling out reporters for doing lazy or misleading stories. And the fact that she could delve so deeply into a complicated subject and still attract a large audience probably was the biggest lesson of all, especially for newspapers laying off experienced reporters and pushing for shorter stories.

From Calculated Risk’s tribute:

Tanta liked to ferret out the details. She was inquisitive and had a passion for getting the story right. Sometimes she wouldn’t post for a few days, not because she wasn’t feeling well, but because she was reading through volumes of court rulings, or industry data, to get the facts correct. She respected her readers, and people noticed.

Here’s how the New York Times described her influence:

Thanks in large part to Tanta’s contributions, Calculated Risk became a crucial source of prescient analysis as the housing market at first faltered, then collapsed and finally spawned a full-blown credit crisis.

Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”

Tanta’s real name was Doris Dungey, and she most recently lived in Upper Marlboro, Md. Most regular readers never even knew any of that. In the blogosphere she was just Tanta, and everyone who cared about the mortgage meltdown knew her name.

(flickr)

Given the reality of a credit crunch that shows few signs of easing despite the billions of dollars of government money thrown its way, an alternative to offering the new president-elect congratulations might be: “Welcome to hard times.”

The honeymoon period that most new presidents enjoy has probably been voided this time around. From Day One, as the former Democratic presidential candidate, Sen. Hillary Rodham Clinton used to say, President Barack Obama will face a financial crisis that only threatens to become more severe at the start of 2009. And it’s one for which there are no simple fixes — only controversial and painful remedies that may or may not work.

Illustration by: Matt Mahurin

“It’s really analogous to choosing a new skipper for the Titanic after it already hit the iceberg,” said Guy Cecala, publisher of Inside Mortgage Finance, which covers the subprime lending industry. “It’s not the kind of situation where the president can sit down and and concentrate on a plan. He’ll be in damage-control mode every single day.”

The first big problem: The subprime mortgage mess that has led to so many foreclosures already is only about three-quarters of the way through, Cecala said. Foreclosures overall set a new record — with a 71 percent jump in the third quarter of this year, according to RealtyTrac. But more are coming, and soon, as subprime loans with adjustable rates reset this month and in 2009, hiking monthly payments as much as 40 percent.

The Center for Responsible Lending predicts some 2.2 million subprime foreclosures in late 2008 and through the end of 2009.

As bad as that sounds, subprime loans aren’t the only — or even the worst — problem.

Alt-A loans, or liar’s loans, that required no income or employment verification, reach their peak default year in 2009. And Alt-A loans comprise a $1-trillion market, compared to the $885-billion total for subprime loans, according to Inside Mortgage Finance.

The Alt-A loans are already in trouble, with Bloomberg data showing 16 percent of loans made since January 2006 some 60 days late. RealtyTrac is forecasting further defaults in the next few years.

Most people don’t understand that the Alt-A market is larger than the subprime market, and don’t realize how much of the mortgage mess still remains, said Dimitri Papadimitriou, president of the Levy Economics Institute of Bard College in New York. “A lot of people really have no idea of the size of this,” he said. “If you want to paint a depressing picture, it’s quite possible.”

In the meantime, payment option adjustable-rate mortgages, that allow borrowers to choose the amount of their monthly payments, begin their three- and five-year resets in 2009, and continue for the next three years — or for the duration of new president’s entire first term.

These loans allow borrowers to pay only the interest on their loans for the first few years. But then their payments jump dramatically, and some borrowers may be facing increases as high as 63 percent, Fitch Ratings concluded recently. That kind of hike could add an extra $1,053 per month to a borrower’s payment.

“The POARMS are definitely the next disaster waiting to happen,” said Kathleen Keest, senior policy counsel at the Center for Responsible Lending.

It’s not likely that borrowers will sell or refinance their way out of any of this, given that the steep decline in home prices is only likely to continue. Nearly 1 in 6 homeowners now owe more on their mortgages than their homes are worth, according to Moody’s Economy.com.

“With more people upside down, if you lose your job, or someone gets sick or hurt, it’s even easier to make the decision just to walk away,” said Lawrence White, an economics professor at New York University’s Stern School of Business.

Add to that the deteriorating economy, which is likely to ensnare more and more prime borrowers, who could lose their homes to foreclosures because of rising unemployment, corporate cutbacks and layoffs.

“You don’t have to overanalyze the situation,” noted Cecala, of Inside Mortgage Finance. “All these problems are just going to get worse.”

Given all this, the new president may not be able to wait until he takes office to take action, said Desmond Lachman, a financial markets expert with the American Enterprise Institute. The credit crisis is so severe that Obama should begin stepping in immediately, possibly by using his position as a senator to propose a stimulus package, Lachman said.

Martin Feldstein, a Harvard University economics professor and adviser to the campaign of GOP Sen. John McCain (Ariz.), first pushed that idea in a Washington Post op-ed last week. His point was that with both candidates also serving as senators, both had options to act early, if elected. From Feldstein:

Further legislation to deal with the economic crisis should not wait until the new president takes office. Fortunately, the president-elect will be a senator and can propose legislation without waiting to be sworn in as president. Immediately after Nov. 4, the winner could, and should, take the lead in the legislative process.

The problems with mortgages are just one piece of the bigger credit crisis, which has shown little sign of improvement despite the $700-billion government bailout, Lachman said. The auto industry is imploding, consumer confidence is at a record low, and home prices keep falling. Banks stubbornly refuse to lend. If the new president-elect waits until his term in office begins to start moving on the crisis, it could be too late, he said.

“The economy is literally falling off a cliff,” he said. “We’re just in this downward spiral. In my view, you can’t wait until March or something. There’s a lot riding on this.”

The new president will have to make decisions that may be bold, unorthodox and with unfortunate long-term consequences, Lachman said. But the dire economic situation will give him little choice.

And it’s not just the start of his term that will be consumed by the financial crisis, Lachman said. Obama may find his entire presidency defined by difficult economic times, just as Franklin Delano Roosevelt did, some 75 years earlier. Friday’s news conference on the economy – Obama’s first as president-elect — marks only the start of a long battle ahead.