Countrywide Financial Corp. has mailed checks for more than $3,000 to hundreds of Connecticut residents who lost or could lose their homes as a result of the company’s “abusive and unfair” home loan practices, Attorney General Richard Blumenthal said Monday.

The payments are part of a previously announced, $8.4 billion, multistate settlement with Countrywide, now owned by Bank of America. Connecticut’s piece of the $113 million installment comes to $1.27 million.

In October 2008 Bank of America initially agreed to settle the states’ suits for $8.4 billion, and a final deal was finally worked out in June, Blumenthal said.

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Lucky for my readers, I went to “Charm School”. If not for that I’d be foaming at the mouth and posting obscenities. Now I say, “That’s NICE.” I received changes in terms from my credit card provider. My periodic rate raised 5% for new purchases. That’s NICE.

In September 2008 my periodic rate was 15.99%. By December it had dropped to 14.99%. Now when the rate should be much lower, I receive a change in terms with my December statement raising my rates to prime +13.99%. The notice states that the rate would be no lower than 19.99%! That’s NICE. I am fortunate that so far my payment or my interest rate has neither doubled or my credit limit been reduced. After reading the news stories around the country, that seems to be the trend.

A year ago, economists were stunned that credit cards were not defaulting at the same rate as mortgages. I explained that people held credit cards in reserve to take the place of their cash stash or nest egg. They would make the payment, if at all possible and try to reduce their balance and keep or increase available credit. Now, it may be a different story.

Unemployment and borrowers’ irresponsibility will be blamed for defaults while banks and credit cards are busy shooting themselves in the foot. Yes, the financial institutions built this house of cards, excuse the pun. Borrowers consistently making their payments are strapped for cash and bitter about how they are being treated. Did you ever wonder why banks get warnings on regulations that do not go into effect until July 2010, and their customers get “Surprise B****”?

We have reports that state “My credit limit was reduced with NO Warning”. It makes it difficult to rent the car after you used the plane ticket. I am stranded in a strange city, because my credit limit was cut and I did not know it. Or worse yet, I feel that a government bail-out is not enough. I pay with my taxes and with over limit fees and penalty interest rates. That’s NICE.

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We receive input from many of you and we are wondering about Saxon Mortgage once again. It seems insurance companies bill Saxon well ahead of time, but 30 days later Saxon sends letters to the homeowner. The letters say that hazard insurance has not been paid. Yes, there may be a transition as Saxon becomes the servicer for other banks. Many realtors, however, tell us that Saxon has other issues.

The problem clearly comes from the fact that Saxon holds insurance payments until the very last minute before releasing payment to the insurance company. Perhaps they should revisit their own correspondence department.

In talking with “Esther” from Saxon one customer reported that Saxon paid their insurance company three days before the letter was sent. The old “The check is in the mail” excuse from Saxon, I guess. Of course each error takes time to track down. You and I both know that letters like these cannot be ignored. After calling the insurance company, and then calling Saxon, customers still do not know if everything will work properly. Realtors say Saxon is often a lender of last resort. Could this be because they anger homeowners?

See more about Saxon Mortgage at SaxonWatch.com

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The timing could not have been worse for AIG. I read the first story of the “Retreat” on the heels of the $85 billion and sympathized. AIG will not be able to win. Unlike naked short selling on the stock market, resorts and business actually have and reserve assets. Customers are not allowed to tie up an asset until the fashions or seasons change and they can then fill their position by paying sale prices. The outrage will be unanimous and AIG will be the butt of every joke. Incensed rhetoric of congress and the senate will be heaped upon them.

The story broke as an Executive Retreat that cost $440,000 on the heels of an $85 billion government bail out. AIG tried to explain that it was in support of sales strategies and achievements and not an executive retreat. It really did not matter. While I was amused by the implication, I also understand the reservations were made months or years ago. AIG would probably not going to get a refund if they had cancelled the event. AIG would still be responsible for the cost of the resort and probably to their employees for lost wages and transportation.

The resort, staff, local caterers were all on line to host the event months before AIG was bailed out. It was too late schedule another event of this magnitude. AIG was going to pay whether the event was held or not. Everyone seems to have forgotten the entertainment industry has non-refundable booking fees. The meals, rooms, facilities are reserved in advance and cancellations are penalized depending on the amount of time to restructure and allow other arrangements during the time slot. AIG was going to pay, end of subject.

The first retreat was held the weekend following the $85 billion bail out. After the request for an additional $37.5 billion the next “Sales Seminar” was cancelled. Will AIG still have to pay? Or will they get more favorable treatment than I would under the same circumstances?

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Mortgage Blues has moved to a new server for better and faster service.

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When the news hit the street, subprime borrowers took the first hit. No one seems to remember the sequence of federal manipulations or new mortgage terms, which were onerous to the point of being predatory. Terms which were deceptive and misrepresented by the mortgage brokers and lenders. Everyone in the industry wants to wheel and deal, but no one wants to milk the cow.

I used a term that is well understood in an agricultural community. The problem is greed and impatience. When a house is sold or refinanced there are so many up front fees for the closing costs, realtor commissions, appraisals, title search, surveys, loan origination, insurance, and taxes. Every sale or refinance added 3 to 15% to the cost of the home because of fees.
It did not change the fact that mortgages are amortized from 15 to 40 years.

The tax laws were changed in 1986. Interest was no longer tax deductible on credit cards, automobile and personal loans. Until that time I received interest statements from every financial institution where I made recurring payments totaled them and deducted all the interest on my taxes. I don�t know why, maybe the banks cried over the amount of paperwork, then made political contributions and lobbied against the practice. After that changed all deductible interest on a personal tax return was linked to your home. Then the practical tax advice was to consolidate and borrow against your home. The average American was encouraged to have a second mortgage or refinance. Either way the result was the same. You extended the term and it was secured by your home.

Credit card companies lost market share. New customers were offered low rates to open accounts. Customers were offered balance transfers or cash advances at low interest rates. In 1997 or 1998 I received a balance transfer offer that was too good to pass up. The rate on the transferred balance was fixed for the life of the balance at prime �(minus) 4.4%. The interest rate started at 4% APR, went up to 5%, then it dropped to 0%.

The fed lowered interest rates to stimulate the economy. While interest rates were low between 2002 and 2004, it was good for people that used credit. People bought more expensive homes, second homes, and investment properties to be able to deduct the interest. Property renovations became the rage.

OPM (Other Peoples Money), I bought distressed or foreclosed properties at bargain prices and lived in the house while making renovations. Interest-free credit for 12 months paid for floor covering, appliances, and other materials. The property was sold or refinanced with cash back at closing (cash out refi) before the interest rates on the cards increased to the standard rate. Sale or refinance of the home would cover the fees, recover my down payment, pay off the credit cards, and pay my real estate agent. In retrospect, all I accomplished was staying busy.

The experience was fun and challenging for me, but it was bad for banks. Inflation was relatively low, but if you kept money in a traditional savings account you just watched the value of the nest egg diminish every day. People withdrew the bulk of their savings from banks and invested in managed accounts. My local savings account is little more than a rainy day fund. I budget and deposit monthly increments to cover insurance premiums, local taxes, and automobile repairs. It is convenient and readily available to me. It does little to help banks conduct business as they did in the past. Four banks failed in 2001and eleven banks failed in 2002.

The first collateralized debt obligation (CDO) was introduced in 1987. In 2001 David X. Li introduced the Gaussian copula models which allowed for the rapid pricing of CDOs. We�ve all heard the term �Mark to Model�. That�s the model. In a perfect world, the value of a CDO could be calculated at any time during its cycle. Oh, the marvels of higher mathematics and better computers. Unfortunately the Model is only accurate in a vacuum and could not be trusted on MBS with 75% of the assets paid off early because they sold or were refinanced, or when loans defaulted (because of ridiculous loans or inadequate underwriting standards), or when property values declined.

The fed lowered interest rates and the prime rate fell from 9.5% in January to 5.5% in December 2001. The same year the �Model� was developed. It was a calculated risk and the plan was to churn the economy and burn the savings. The prime interest rate continued to decline until it stabilized at 4% in July 2003 until June 2004. Equity stripping and Reverse Mortgages became the new prosperity to fuel the economy. That was the beginning of the �Housing Bubble�.

In 2004 interest rates increased and activity slowed in most of the states. Margins were too narrow, fees consumed most of the equity, and interest rates were higher. Home purchases and refinances dwindled to a more realistic level. People found their comfort level and decided to maintain rather than take on more debt.

New mortgage products and terms were created that targeted subprime and Alt-A borrowers. These were minimally qualified or unqualified na�ve borrowers and speculators. Adjustable rate mortgages with introductory teaser rates, optional payments resulting in negative amortization, no or borrowed down payments, no documentation, and no oversight. Risk assessment was downplayed and the money began rolling again. Higher paying products were needed to woo investors and replace mortgages that had been refinanced away from products higher interest rates.

I won�t go so far to say the Fed caused the problem, but they sure did contribute to it. The market gains and housing bubble were an artificial prosperity based on increased debts. Now the chickens have come home to roost, and at what cost?

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Jay Leno may joke about tracking the path of a hurricane by tracing the area of insurance cancellations prior to the storm season, but when Kansas Bankers Surety, (a Berkshire Hathaway company since 1996) eliminates private bank deposit insurance for deposits exceeding FDIC protection, need I say more?

On 7 September 2008 the FDIC had information �For immediate release�, assessing the risk to thrifts and banks exposed after the takeover of Fannie Mae and Freddie Mac. Does it seem unusual that the FDIC releases information as sensitive as the vulnerability of bank and thrift investment holdings on a Sunday and 2 days later banks get cancellation notices for extended coverage?

Public information officer Bob Hanson reports that an examination of Kansas Bankers Surety showed the company was �strong� and financially sound. �It�s a pure business decision from what we understand,� said Hanson.

Private bank insurance is contracted by banks to protect deposits that exceed FDIC insurance protection. While the policies are not negotiated directly with depositors, banks contract for additional insurance to protect the accounts of larger depositors and businesses. Premium rates vary based on the financial condition of the banks as assessed by Kansas Bankers Surety. Apparently the Berkshire Hathaway company sees supplemental bank insurance as “bad business�.

11 banks have failed so far this year. With more than 3 months to go this year, it already equals the number of bank closures in 2002. I do not know if Kansas Bankers Surety insured any of the failed banks, but five of the banks were in the Midwest. 2 of the banks were in Missouri, 1 bank in Kansas, 1 bank in Arkansas, and 1 bank in Minnesota.

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Ambac paid $850 million to CitiBank for impairment to a CDO (collateralized debt obligation) reportedly worth One Trillion 400 million dollars ($1.4 Trillion) and let Cibibank keep the assets. I found it interesting because the compensation was in regard to the difference in value from to mark to model as opposed to mark to market.

That is old news, but in the last week there have been multiple buy-backs of Auction Rate Securities (ARS). The comparison is �apples to oranges�. If I understand correctly a buy-back is forced at full value ARS. The equivalent of a money back guarantee or buyers rescission enforced because of statements of inflated value and security by rating companies and the package seller. Interesting because of the bond insurance compensation based on the insurance coverage for the ARS.

Some ARS are insured for face value for the level. In the CitiBank Ambac transaction, Ambac was on the hook for the level of impairment $1.4 Trillion and was able to negotiate the figure down to the estimated level of impairment, therefore paying the decline in value.

It makes me wonder �What happened to the collateral that backed these financial enterprises?� The reason I ask is probably archaic and na�ve, but I remember a car my father had an accident in 1971. The accident was not his fault and the car was an import and difficult to estimate repair costs. In that case a car was purchased for $350 the insurance company paid $300 for the damage to the car and let my father retain control of the �asset�. Some repairs were made and I drove an ugly car for 2 years. When other repairs were necessary and parts were not available, the car was scrapped. The scrap yard paid $100. The profit on the car was $50 and it was driven daily for 2 years after the accident.

Later news from Australia related the loss in value of investment CDO�s. The story referenced declines in value of CDO investments from $500,000 to $37,000 and $5 Million to $4.2 Million. The story went on to say that while some CDO�s were sold at a loss, $5 Million were retained because they were still generating revenue.

To get back to my first point, where are the assets? What are they worth? Just because they can not be sold does not mean there is no value in collecting the payments. That reminds me of another story from my childhood. Our neighbor down the lane had an ugly Holstein cow. She was thin and had gotten pink-eye and was blind in one eye. The neighbor considered selling her, but it would cost twice as much to replace her. When asked about Holly , he�d scratch his head and reply �Yeh-up, I could replace her, but she�s giving as much milk as she ever did.�

It may be the most lucrative move Citibank has made for a while. Ambac and their investors feel they made out like the proverbial bandit paying 40 cents on the dollar. CitiBank received more than 40% of the bond�s value, still has control of the servicing rights, and collateral. Just who is zooming whom and laughing all the way to the bank, Citibank or Ambac?

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A Barclays Financial report devoted to the impact of Option Arm estimates 48% of the loans will default when the mortgage payments reset or are recast. Mortgage payments are estimated to increase between 60 and 80%. I am not privy to their information, figures, and calculations but under today�s circumstances I feel Barclays report is very optimistic.

Fixed Payment Option ARM Recipe for Disaster first published here August 25, 2007 �The payments for the mortgage described to me were fixed for 5 years. The interest rates would adjust to market rate and the difference added to the principal on the mortgage. After the 5th year, I would face a higher payment based on the reset, owe several thousand more on the house because of negative amortization from accumulated interest, and reduce the effective term of the adjustment from 30 to 25 years.�

The cold call I received from the mortgage broker described a mortgage with payments fixed below the prime interest rate for 5 years, with a calculated effective rate above prime. The effective rate had the potential of adjusting because it was still an ARM and the payments would remain fixed while the principal increased and the term decreased. It sounded bland and harmless on the surface.

After news of the Barclays Capital report I dug a little deeper and crunched numbers to calculate the following results:

$250,000 Mortgage

4% Fixed Interest-Only payment for 5 years of $833.00 per month (will not amortize)

Amortizing payment on a 30 year mortgage at 6% interest is $1,498.00 per month
Interest only 6% monthly payment $1,250.00

Using the Interest-Only difference between the payment the borrower is increasing their principal balance by $417 for every month they make the minimum fixed payment.

What was originally a $250,000 mortgage would have a principal balance of $250,417 after the first month�s payment. The effective interest rate (6%) will be charged the on the entire principal balance. If the borrower made the interest only fixed payment of $833 for 60 months, their balance (calculated at the effective rate of 6%) when the mortgage is recast at 5 years would be $284,245.00.
The principal balance would be 13.7% higher than the original mortgage, well below the adjustment parameters of 15 to 20 percent.

The mortgage payment is recast at 5 years or when the balance owed raises to 15 to 20% more than the original mortgage. It is then calculated to amortize fully within the original 30 year (360 months) contract. The problem is that the borrower now has only 25 years or 300 months to pay off a $284,245 mortgage.

The payment would jump nearly $1000 per month. The payment would rise from $833.00 to $1,831. To fully amortize the loan and pay off the balance within the allotted time the new payment would be $1831. Based on an effective rate of 6% that does not change for the life of the mortgage, I estimate the payment will increase by 120% instead of the 80% increase estimated by the Barclays Financial report.

Was the payment based on 4% in my calculations a teaser rate? After all it was based below prime. The effective rate in my calculations remained fixed at 6%, how many ARMs remain unchanged for 30 years? How many mortgages were created similar to the scenario I presented? What deranged mind came up with the product and the snake oil to package it and sell it to investors? I knew it was insanity 3 years ago. What took them so long?

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Freddie Mac announced yesterday that it would double compensation paid to mortgage servicers for each workout that helps avoid foreclosure of a mortgage owned by Freddie Mac. In order to qualify for the reimbursement, the mortgage must be at least 90 days delinquent. An independent third party vendor must make the outreach and the servicer has to have had no prior contact with the borrower.

Beginning August 1st, compensation for repayment plans will jump from $250 to $500. Loan modification compensation will also double to $800. For pre-foreclosure sales (short sales), under which Freddie Mac accepts less than the full amount owed on a borrower’s loan, compensation will increase by $1000 to $2,200.

Foreclosures will be delayed up to 10 months from the due date of the last payment to the foreclosure sale, giving additional time to negotiate a repayment plan, mortgage modification, or complete a short sale.

The information given in the first 3 paragraphs is available in multiple articles, so it is hardly news at this point. I would like to know how Freddie Mac or the servicers believe this will work.

Define �Prior Contact�. Does a mortgage statement qualify as prior contact with the borrower? Will it eliminate the �Attempting to collect a debt� telephone calls and letters to borrowers with late payments? Will customer service be disrupted? Will servicers be disqualified from compensation because responsible borrowers contact them with questions or because their payment is or will be late?

Define �Independent third party vender�. Independent would indicate this key player is not receiving compensation from the servicer or Freddie Mac. How is this entity selected and approved, by the servicer, Freddie Mac, or the borrower? How is this additional layer of silt in murky water being compensated?

Many borrowers seek some type of loan workout directly. There are already too many borrower complaints about lack of information or cooperation from mortgage servicers. How is the borrower to know if their mortgage ultimately ended up with Freddie Mac? My mortgage statement identifies the name of the servicer (mortgage company) receiving my payments. The mortgage company name I see has �no real authority�.

Yield Point Spreads were charged and paid going into the mortgage and payment to a mortgage foreclosure specialist to stop a foreclosure. The borrower is out thousands of dollars that has contributed nothing to the initial quality of the mortgage loan or contributes to any arrearages if the mortgage is in default. At the least risk, the middlemen reap the benefits, in this case brokers, servicers, and negotiators. Borrowers, investors, lenders, and insurance bear the brunt of the mortgage meltdown.

How will the mortgages be reported? Will it delay the inevitable and be used as a means of misinformation? What effect will it have on identification of �under-performing� or non-performing mortgages? The timeline for mortgages in foreclosure will be delayed up to 10 months, so suddenly foreclosures are down. Will it help the house remain occupied thus saving management fees and protect it from vandalism? Will borrowers use it as an opportunity to keep their home or live in it gratis for 10 more months before hitting the streets?

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