An article by Diane Francis appeared in the Financial Post on Saturday, November 17, 2007. Titled “Subprime mess is a crime story” the article outlined key issues. Diane said “At the top were mortgage lenders, then Wall Street and others who exported junk debts to lenders around the world after prettying them up. At the bottom was a corrupt system that handed out mortgage broker licences like driver’s licences, and then handed out mortgages like candy at Halloween. In between were crooked appraisers and organized crime.” (see her article) Why didn’t regulators and the Feds get involved? One answer may surprise you:

After September 11, 2001 the U.S. Government needed to move the economy forward. Lower interest rates helped to stimulate the economy, and mortgages were attractive. Refinances gave homeowners the cash they needed for improvements and debt consolidation, and the money went back into the economy. Lenders were given a free pass. Under the party line of “helping America” the U.S. government looked the other way as new risky mortgages were invented. Lenders and Wall Street were told that they were great Americans, single handedly reviving the economy while making America strong again. An examination of interest-only loans, no-doc loans, and skyrocketing home prices in the Washington DC area and California caused little concern as long as the economy looked good.

Economists openly said that the amount of debt distortion would be relative to the amount of the resulting crash which would undoubtedly take place. That statement was based on historical analysis dating all the way back to the depression and crash of 1929. The Bush administration decided to make the economy look good at all costs. To hell with history. “If you want to know what will happen in the future one must study the past” meant nothing. We see the results today, but many questions remain unanswered, such as:

What did the U.S. government offer lenders and investment banks in return?
What did Alberto Gonzales’ U.S. attorneys really know before they were fired?
Why did ICE and Homeland Security permit new mortgages for illegal aliens subject to deportation?
Why was Ameriquest owner Arnall appointed as ambassador to The Netherlands?
Why was the OCC painted as inept, and why was Julie Williams replaced?
Why did the OCC attempt to block state laws and regulatory efforts?
Why did the Bush administration see the need for new bankruptcy laws?
Why did the Bush administration see the need for tougher class action laws?
Why did Alan Greenspan retire when he did?
Why did William Aldinger and John Bond leave HSBC when they did?
What is the relationship between Wells Fargo, Household International, and the Wells Fargo HSBC Trade Bank?
Why was a London based bank (HSBC) allowed to buy heavily into the U.S. subprime market?
Why was the Bush adminstration receptive to changes in Soldiers and Sailors during time of war?
Why did the SEC change policy on loan syndication in 2005?
Why did the Federal Reserve Board change policy on derivatives and syndication in 2005? (see it)
What was Jack Abramoff lobbying for? (Documents show Abramoff’s team had extensive access to Bush administration officials, meeting with Cheney policy advisers Ron Christie and Stephen Ruhlen, Ashcroft at the Justice Department, White House intergovernmental affairs chief Ruben Barrales, U.S. Trade Representative Robert Zoellick, Deputy Interior Secretary Steven Griles and others.)

There are many questions without answers. The Bush adminstration allowed, or signed into law, many new changes in 2005. By 2007 everything fell apart. Nobody in the world gets something for nothing. Today 200,000 people are without jobs as the mortgage industry fell apart. I personally find it hard to believe that subprime, and subprime alone, caused this problem. Aside from lack of regulation and intervention by the federal government, and with a strong desire to shape the U.S. economy, toughening of bankruptcy and class action laws tell me the government knew that initiatives of 2001-2005 would spiral out of control.

Look at one small fact that tells a big story. A foreclosure results in a 1099C for the foreclosed homeowner, leaving a big tax debt. A 1099C is only overlooked if the homeowner is declared insolvent, otherwise the evicted person owes a big tax debt. How are they going to pay it? Just like many other fiscal tricks, 1099C’s without bankruptcy will look like the federal government has huge receivables on the books. In truth they will be almost worthless, adding insult to injury for those evicted and foreclosed upon.

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2. Lawmakers and subprime – a joke again this time? U.S. lawmakers tried it in 2002. They tried it...
3. Designed government subprime and Bush growth initiative Attorney’s General and others are piling on as they...

I do not have any houses serviced by American Home, but have been tracking the progress of the mortgage payment servicers for mortgages during the mortgage meltdown. American Home is holding payments collected from borrowers and not forwarding the money to the lender as specified in their servicing contract. Their defense of the action is “it’s their (American Home’s) money while their bankruptcy is being sorted out by the courts.

While American Home does not effect me, I consider that nearly 25 percent of my mortgage payments are held in escrow to pay taxes and insurance. If American Home and other mortgage loan servicers are withholding funds from the lenders, will they release funds to pay taxes and insurance? I’ve paid the mortgage and escrow every month. Will I face a double whammy for a tax bill in October because the servicer stiffed me, too?

In papers filed with the U.S. Bankruptcy Court in Wilmington, Del., Monday, Ginnie Mae cited worries about a “serious disruption” for homeowners whose mortgages are entangled in American Home’s collapse.

In an affidavit, Ginnie Mae executive Paul St. Laurent III said the agency has had to tap federal funds to cover payments owed to investors on American-Home-serviced loans, because the cash that should be coming from those mortgages is tied up in the bankruptcy.

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1. American Home Mortgage Escrow Problems? You played it smart and were cautious. You have...
2. American Home Mortgage Survival Blues American Home Mortgage is singing the blues today but...
3. American Home Mortgage’s 40 biggest creditors American Home Mortgage’s 40 biggest creditors include virtually all...

If you are a victim of foreclosure you might receive form 1099 from the Internal Revenue Service. In a recently commented case the homeowner lost his home to foreclosure. His mortgage company, Wells Fargo, bought the home at auction on the court house steps. Wells paid one dollar for the home. The former owner received a tax bill for the payoff, plus fees, minus one dollar.

My advice is to study your paperwork and challenge the tax bill. If a former homeowner has declared bankruptcy and is insolvent there is no tax bill in most cases. Many people do not declare bankruptcy and simply move out of the home. If family circumstances changed drastically, such as illness or job loss, a huge tax bill can often force people into bankruptcy. We note that it has always been our opinion that the government and financial markets knew of risk in the mortgage market and lobbied for changes to bankruptcy laws (2005) before current problems surfaced.

The New York Times has a great article about foreclosure and tax liability. Examples show how it is beneficial to track what happens to your former home. See the article here

Related posts:

1. Forgiven Mortgage Debt Not Taxable by Internal Revenue Service Thursday, December 20, 2007 President Bush signed a measure...
2. What did the U.S. Government offer lenders to overlook them? An article by Diane Francis appeared in the Financial...
3. Foreclosure Avoidance Scams We noticed a very informative page on the Settlement...