Monthly Archives: May 2014

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A luxury house along “Billionaire’s Row” in San Francisco.

The failed economic policies of the Obama administration have been evident in measures of every important fundamental for six years now. Dismal job growth. High unemployment. Weak consumer demand, and so on. The biggest failure of the Obama administration was arguably the refusal to write down mortgage debt and force the top one percent of wealth holders to share some of the losses sustained during the housing market crash. While monetary policies pursued by the Fed, and a bailout of the secondary housing market with taxpayer dollars, temporarily provided a shot in the arm for housing prices, these gains were artificial. They weren’t based on genuine demand for housing by the majority of Americans. The result is that the top one percent of the U.S. housing market, the luxury segment, is booming, while the rest of Americans are having trouble affording homes. Now the housing market appears to be stalling out, except for luxury purchases by the elite whose wealth was protected by virtually every economic policy advanced through the financial crisis.

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A single family home in Oakland.

Let’s review the problem. In the 2000s the U.S. housing market was flooded with cheap credit. Lenders extended giant loans, many of them sub-prime, and the prices of houses shot upward in a bubble. But stagnating wages for American workers meant that the prices of real estate diverged from the reality of the ability of the average household to safely repay these loans. When the financial system imploded, the price of housing collapsed, and it was the borrowers who sustained the brunt of losses in the form of equity. The debt remained to be repaid, however, because Obama and his economic advisers chose to protect the wealth of the top one percent.

As economists Atif Mian and Amir Sufi have pointed out in their book House of Debt, the federal government could have taken over as the servicer of mortgage-backed securities and renegotiated millions of loans, dropping interests rates and principal balances. Or the government could have allowed bankruptcy judges to reduce mortgage debt burdens. The few principal reduction programs there were, like the Home Affordable Modification Program, could have been pushed much further. As is, programs like HAMP served only a small fraction of distressed borrowers with underwater loans. HAMP and other loan modification programs did not meet their original numerical goals.

By not making creditors share the pain of the collapse of real estate prices, the Obama administration enforced a giant wealth transfer from the majority of Americans to a small minority, literally the one percent who own the majority of stocks and bonds, particularly stocks in banks and mortgage servicing companies, and bonds backed by residential mortgage debt.

But the wealthy also cache their fortunes in non-housing related stocks and bonds, and the Obama administration’s quantitative easing program has been good for supporting the value of these securities. So the wealthy never took the same kind of hit the average American did with housing price dips and job losses. Then the wealthy benefited from federal programs that jacked up asset prices.

Should we be surprised then to learn that the top one percent of the residential housing market is booming while sales of literally every home priced below a luxury-grade are dropping? This is one consequence of the Obama administration’s housing and economic policies.

A new batch of numbers from the real estate research firm Redfin illustrates the consequences of the Obama administration’s economic policies by comparing the very top of the American real estate market to everything else. “Sales of the priciest 1 percent of homes are up 21.1 percent so far this year, following a gain of 35.7 percent in 2013,” writes Troy Martin of Refin. “Meanwhile, in the other 99 percent of the market, home sales have fallen 7.6 percent in 2014.”

“For the top 1 percent, the housing market is still booming. But for the rest of the market, the recovery is running out of gas,” concludes Martin. “As home prices have risen, wage and job growth have failed to keep up.”

Redfin’s research shows that in virtually every major metropolitan region the luxury segment of the housing market, the top one percent of homes in price terms, are selling fast and at higher prices. Not surprisingly, there’s considerable regional variation, but it’s a nation-wide phenomenon.

The real estate market in the San Francisco Bay Area is perhaps the most unequal and driven by sales to the super-rich. Luxury home purchases are way up in Oakland, San Jose and San Francisco, with Oakland and San Jose experiencing a virtual doubling of the luxury market over the past year. The top one percent of the market for Oakland, San Jose and San Francisco combined is priced at an average of $3.7 million, but San Francisco has pulled ahead of the rest of the nation with an average home price of $5.35 million for the top one percent of its market. Some of this is likely due to the booming tech sector which is creating thousands of millionaires in the region.

Screen Shot 2014-05-30 at 10.43.54 PMFor the majority of Americans the problem boils down to household debt. There’s still too much debt for the average household to sustain purchasing power that would drive an economic recovery, including a recovery in the housing market. From 2003 to the peak of the housing bubble in the third quarter of 2008, total household debt shot upward by about $5.4 trillion, according to data compiled by the Federal Reserve Bank of New York. From the peak of the housing bubble to the present, total household debt only decreased by $1.5 trillion. That means that about $3.9 trillion in debt piled onto U.S. households during the housing bubble is still weighing down family budgets. Most of this debt, about $2.89 trillion, was mortgage debt.

Over the same time period wages remained flat for most Americans. The median household incomes in the year 2000 was approximately $42,000. In 2012 it was about $51,000. Accounting for inflation, the real value of household income actually declined over this period by $5,000.

The income and wealth gains at the top of America’s economic pyramid over this same time frame should be familiar by now, as they have been extensively explained in recent research. What’s important to point out, however, is that the the average household, the median Americans whose incomes dropped by $5,000, took on significant mortgage debt during the 2000s, altogether in the trillions of dollars, and the lenders of this capital, ultimately, are the top one percent households.

So that’s why we see the luxury housing market booming while virtually 99 percent, the rest of America is stagnating.

How do judges reach conclusions in complex cases where the law is often open to interpretation, or where the laws are still changing in response to the times? Are judges influenced by cultural currents? Do politics sway their decisions? What role does their material interest play in shaping their rulings and legal reasoning?

Appellate Court Judges Fin Holdings 1

A network diagram of the 42 of California’s 105 Appellate Court judges who own at least $2,000 of stock or bonds in a financial company. The larger and darker colored nodes are financial companies. The node size is based on the number of judges who reported an ownership stake in the company. The larger the line connection two node (judges to their investments), the larger the investment in dollar terms.

I don’t claim to have answers to any of these questions. But in searching for some possible reasons for the outcomes of homeowner lawsuits against banks, mortgage lenders, and mortgage servicing companies in California, I thought it might be useful to compile information on the economic interests of the judges themselves. The advantage of focusing on the economic interest of judges, as opposed to other factors that shape their interpretations of law, like political ideology or culture, is that material economic interests are literally material, and therefore easily identified and measured.

Appellate Court Judges Fin Holdings 2

17 California Appeals Court judges reported owning at least $2,000 of stock or bonds in Bank of America, the most of any financial company. Bank of America is one of the largest mortgage lenders and servicers in the U.S., and has been frequently sued by California homeowners over alleged fraudulent and deceptive business practices, and wrongful foreclosure. Justice Elizabeth Grimes reported owning between $100,000 and $1 million of stock in Bank of America in 2012, the most of any judge. Altogether these 17 judges reported owning as much as $2.3 million of Bank of America securities.

Appellate Court Judges Fin Holdings 3

Citibank was the second most commonly held financial company investment by California’s Appeals Court judges. 10 justices reporting owning at least $2,000 in stock or bonds.

From 2008 to the present California’s courts have been swamped with lawsuits, many more than in prior years, contesting foreclosures. Most often the plaintiffs have been homeowners suing banks and mortgage servicers over the foreclosure process. The banks have also initiated lawsuits against each other, against businesses, and against homeowners.

I haven’t done the research that would allow me to discern whether or not the banks are winning more than borrowers, but what I’ve heard from plaintiffs’ lawyers is that they feel the justice system has been biased in the favor of large financial companies. Lawyers and homeowners say that the courts favor the interests of creditors over consumers. Has anyone compiled comprehensive statistics on the outcomes of lawsuits between banks and borrowers through the financial crisis? I’d love to see that data set.

Appellate Court Judges Fin Holdings 8

Judge Donald Franson of the 5th District Appellate Court reported owning stocks or bonds worth significant amounts in multiple banks as well as in the Och-Ziff hedge fund (which was briefly financing a foreclosure to rental business), the credit card powerhouse VISA, and Warren Buffet’s conglomerate Berkshire Hathaway (which owns a bank, a real estate firm, and other real estate and financial sector companies).

One theory to explain what homeowners and their lawyers perceive as judgements biased in favor of financial companies involves the material interests of the judges. In the most direct sense, many judges own stocks and bonds in mortgage lending and servicing companies, and so these judges might be biased in favor these same companies when they are sued by borrowers. Judges should recuse themselves from cases in which they have a financial interests in the profitability of one of the parties before them, but they sometimes don’t. Recusal is meant to avoid any actual biased options stemming from conflicted interests on the part of the justices, but it’s also supposed to prevent even the perception of a conflict of interest. Perception that justice system is fair is as big a deal it seems as the actual fairness of outcomes, however you might measure the latter.

Appellate Court Judges Fin Holdings 9

Justice Arthur Gilbert of the 2nd Appellate District Court disclosed owning stock in three of the largest national banks that dominate the mortgage lending market, as well as having owned a financial stake in Lender Processing Services, a small specialized financial company that describes itself as “a leading provider of mortgage and consumer loan processing services, mortgage settlement services, default solutions and loan performance analytics.” Gilbert has sat on appellate panels hearing foreclosure lawsuits pitting banks and mortgage servicers against homeowners.

A more nuanced version of this conflict of interest theory has it that judges are ideologically influenced by their class position as high income earners, and holders of considerable wealth, a lot of which is invested in the securities of the major banks, and the mortgage lending and servicing companies. Quite a few of California’s Appeals Court judges are millionaires and they vest their wealth in stocks and bonds of large blue chip companies, often ones that pay hefty dividends. The financial sector is a major investment target for judges, and its biggest banking and mortgage lending companies pay them hefty dividends. Under this theory, even if a judge doesn’t hold stock directly in a financial corporation that argues a case in their court, judges are believed to be influenced by their general interest in the banking and mortgage lending sectors of the economy. Judges are said to exhibit bias in favor of the banks, and to respond to borrowers’ legal arguments with a weary skepticism as rulings in favor of borrowers could upset the appreciation of stocks and the yields on bonds of the entire financial sector.

Lastly it should be noted that financial companies are probably not the largest targets of investment by California’s Appeals Court judges. If ranked by the upper end of the disclosed range of investment, finance and banking falls after tech, energy (mostly oil and gas), consumer products, industrial manufacturing, and diversified funds (including private equity, mutual funds, bond funds, etc.) as a sector of the economy where judges like to seed their wealth.

California Appellate Court Judges Ownership of Securities, by Sector of the Economy, Reported as of 2012.
Sector Low Est. High Est.
Technology $3,214,000 $31,620,000
Energy $3,902,000 $27,560,000
Consumer Products $2,474,000 $24,270,000
Industrial $3,272,000 $22,960,000
Funds $3,984,000 $21,770,000
Finance, Banking $4,034,000 $21,270,000
Retail Stores $914,000 $8,820,000
Pharma & Biotech $804,000 $7,770,000
Telecom $752,000 $7,260,000
Real Estate $1,586,000 $6,780,000
Healthcare $386,000 $3,680,000
Entertainment & Hospitality $550,000 $3,400,000
Utilities $328,000 $3,240,000
Government Bonds $240,000 $2,400,000
Misc $226,000 $2,230,000
Consulting $166,000 $1,630,000
Agricultural $142,000 $1,410,000
Insurance $114,000 $1,070,000
Mining $96,000 $930,000
Media $68,000 $640,000
Logistics $64,000 $570,000
Transportation $34,000 $320,000
$27,360,000 $201,700,000



Citibank’s Michael Corbat, 2nd highest paid banker on the list.

In 2013 the top 27 executives at Bank of America, Wells Fargo, JPMorgan Chase, Citibank, and Ally —the five big financial institutions most responsible for the foreclosure crisis, and subject to the National Mortgage Settlement— paid themselves $296 million in cash and stock. Under the National Mortgage Settlement these banks were forced to write down principal debt on home loans in California. The average principal reduction they granted on 1st lien loans was about $137,000. 33,000 California borrowers benefited from this.

Had the banks applied the $296 million to further principal reduction, instead of using it to pay their top 27 executives, they could have wiped out debt on another 2,164 home loans, effectively saving about that many homes from foreclosure.

And if the banks applied the same sum they paid to their top 27 executives over the past 3 years (2011-2013), a total of $735 million, the could have reduced the 1st lien principal debt on 5,367 homes in California.

To put that in perspective, there were about 31,400 foreclosures in California in 2013, and 283,000 foreclosures between 2011 and 2013. It would have made a small, but significant, contribution to reducing the number of foreclosures and freeing up the finances of thousands of struggling households.

But instead the banks paid their CEOs, CFOs, COOs, VPs and Presidents millions. Average pay in 2011 for these bankers was $11 million each. Wells Fargo’s CEO John Stumpf led the list with over $19 million in compensation in 2013, followed Citibank executives Michael Corbat and James Forese. Three of JPMorgan Chase’s bankers (none of them the infamous Jamie Dimon) followed in the 4th, 5th, and 6th position pulling $16 and $17 million salaries and stock grants.

In 2014 the pay for these 27 executives, whose compensation is public record, will most likely be up yet again, easily topping $300,000,000.