Years of Poor Bank Oversight Caused the Foreclosure Crisis

Well, well, well. The truth is certainly coming to light. I have been having some back and forths (aka, fights) with a commenter on BV on Money on the cause of the foreclosure crisis, one of the driving factors contributing to our struggling economy. But the person didn't want to take my perspective on the crisis as gospel. He no longer has to.

Major news outlets are reporting what many have theorized all along: The foreclosure crisis was caused by years of poor bank oversight. The Daily Beast provides this summary on the revelation:

Banks should have anticipated the widespread problems with foreclosures, now under investigation in all 50 states, because they hired so many inexperienced workers and pushed them to blow through paperwork at a superfast rate. At JPMorgan Chase, the hires were mocked as "Burger King kids"-employees who hardly knew what a mortgage was. Overworked drones at Citigroup and GMAC sometimes just threw documents into the trash. "I don't know the ins and outs of the loan," an employee of a lending arm of Goldman Sachs said in a deposition. "I'm not a loan officer." The banks, some of whom have frozen foreclosures, say they were just overwhelmed by the mortgage crisis. But employees and regulators paint a different picture, saying the national paperwork problem took years to create, beginning during the housing bubble, when banks paid a lot more attention to getting more loans and less to actually servicing them.

You can read about this story in depth on The New York Times.

In their article, 'Insiders Ignored Foreclosure Crisis Signals For Years,' The Huffington Post r eports:

Insiders anticipated the current foreclosure crisis years before it struck and now, it seems, it must get worse before it can get better.

System-wide flaws in the mortgage industry mean that bank employees and government regulators saw the current crisis coming, the New York Times reports...

"We waited and waited and waited for wide-scale loan modifications," FDIC chairwoman Sheila Bair told the NYT. But reforms never came. The framework for a crisis was in place.

Newser.com details the motivation behind this stunning lack of oversight:

The problem dates back to the housing boom, when banks were so busy figuring out ways to make more money, they ignored the lowlier aspects of actually servicing the mortgages they were churning out. Regulators began warning banks they needed to improve such operations as the bubble began to burst, but banks downplayed the problems-partly because servicing loans, especially delinquent ones, delivers such meager profit that there was "no incentive to staff up," says one former employee. By the time banks finally began beefing up servicing units, the situation was out of control.

http://xml.channel.aol.com/xmlpublisher/fetch.v2.xml?option=expand_relative_urls&dataUrlNodes=uiConfig,feedConfig,entry&id=943860&pid=943859&uts=1287161559

http://cdn.channel.aol.com/cs_feed_v1_6/csfeedwrapper.swf

10 Stocks That Will Keep Paying Dividends

A large number of investors purchase stocks for their yields. People on fixed incomes often use dividend payments to cover basic living expenses. Other investors look at companies paying dividends as "safe havens". Their share prices may go down, but at least holders get a quarterly check. It is a good system until the firms with impressive yields become concerned that they are running low on cash.

24/7 Wall St. found a small number of large companies which are likely to keep their dividends at current levels even through a deep recession. These companies have tremendous amounts of cash on their balance sheets, little or no debt, and are in businesses which are almost certain to have strong margins even in tough economic periods.

(To page through gallery, mouse over the top-right portion of the image at left and click on right arrow.)

Getty Images

AFP

BlackVoices.com

10 Stocks That Will Keep Paying Dividends

AT&T
AT&T (T) sells phones and telecom services. This is a sector that will always be with us. AT&T is now into the business of delivering video to people's homes and data to their cellphones. Both are likely to grow for years. In the final quarter of 2008, AT&T had net income of $2.4 billion on revenue of $31.1 billion. The company has free cash flow of $5.4 billion for the quarter and $13.3 billion for the year. For 2008, dividends paid totaled $9.5 billion, shares repurchased totaled 164.2 million for $6.1 billion. Put another way, AT&T is rolling in money. Investors can take the $1.64 dividend and 6.4% yield to the bank.

10 Stocks That Will Keep Paying Dividends

Halliburton
Halliburton (HAL) supplies services to the oil industry. That would seem, at first, to be a bad business to be in as crude prices fall. Fortunately for the company, while oil exploration has dropped quite a bit in North America, it is still a healthy business in part of the Middle East, South America, and a number of areas offshore where fields used to be too deep to reach. In the fourth quarter, HAL had operating income of $776 million on revenue of $4.9 billion. Management has said the 2009 sales will be a little soft, but not catastrophic. Halliburton has cash and receivables of almost $5 billion and payables and debt of $3.4 billion. The firm's dividend is $.36 a quarter which is a yield of 2%. Not a big return, but completely safe.

10 Stocks That Will Keep Paying Dividends

Johnson & Johnson
Johnson & Johnson (JNJ) had revenue of $63.7 billion last year. It made a net profit of $13 billion which was up 22% from 2007.Very few large operations have that level of net margin. The company has three main businesses: consumer, which sells soaps and toiletries, pharmaceuticals, and medical devices. While drug sales were off a bit last year, the other two lines of business improved. JNJ expects EPS this year to be about the same as last. The most recent balance sheet filed with the SEC shows JNJ with long-term debt of under $8.4 billion and cash and marketable securities of almost $15 billion. The company has a $1.80 dividend and 3.2% yield. Its payout is safe.

10 Stocks That Will Keep Paying Dividends

PepsiCo
PepsiCo (PEP) pays out $1.70 which is a yield of 3.3%. There are a number of reasons that the dividend is safe. The most important may be that people will buy cheap soft drinks in almost any economy, whether it is good for their health or not. In its last reported quarter, Pepsi made $1.5 billion on sales of $11.2 billion. The firm's annual operating income of about $6 billion is almost equal to its long-term debt of $6.5 billion.

10 Stocks That Will Keep Paying Dividends

Microsoft
Microsoft (MSFT) may not be the fast-growing company it was a decade ago, but its core software operations still have margins of over 70%. In the last quarter, Microsoft had operating income of almost $6 billion on revenue of $16.6 billion. The firm has almost $21 billion in cash and investments. It has no debt. Microsoft's dividend is $.52 and its yield is 3%.

10 Stocks That Will Keep Paying Dividends

McDonald's
McDonald's (MCD) has a business which is often described as recession-proof. Its dividend is as well. Last year, McDonald's comparable store sales rose almost 7%. When it reported its annual earnings it said it had returned "$5.8 billion to shareholders through shares repurchased and dividends paid, including a 33% increase in the quarterly cash dividend to $0.50 per share for the fourth quarter – bringing our current annual dividend rate to $2.00 per share." The company had revenue of $23.5 billion and net income of $4.3 billion. If anything, the shareholder return from MCD could go up this year.

10 Stocks That Will Keep Paying Dividends

Costco
Costco (COST) is in the top tier of an awful industry. Retailing is falling apart, but a few firms like Wal-Mart are doing fairly well. Costco has a $.64 dividend and $1.4% yield. In the company's last reported quarter, which ended on November 23, Costco's sales were $16 billion, up 4% compared to the same quarter a year ago. Net income was $263 million. Even though very few consumers are shopping, in December the company produced sales of $7.4 billion down only 2% from the same period a year ago. Last week, Costco announced its quarterly dividend of $.16. The company has long-term debt of $2.2 billion and cash of $2.2 billion.

10 Stocks That Will Keep Paying Dividends

Disney
Disney (DIS) has a $.35 dividend and modest 1.6% yield. Some of the company's units may suffer during the downturn. Traffic to its theme parks will almost certainly drop. Advertising on the ABC network is likely to drop. For Disney's fiscal year, which ended on September 27, the company's revenue rose 7% to $37.8 billion. Income from continuing operations dropped 5% to $.4.4 billion and free cash flow was almost $3.9 billion. Disney has over $11 billion in long-term debt and $3 billion in cash. That ratio is not as favorable as for some other companies on the list, but its free cash flow gives Disney a large buffer.

10 Stocks That Will Keep Paying Dividends

Comcast
Comcast (CMCSA) has a good reason keep paying its dividend. Its founding family runs the company and still owns a large piece of the firm. Comcast pays a $.25 dividend for a 1.6% yield. The fortunes of the cable firm may be helped by the government's new stimulus package. Part of the current plan to improve broadband infrastructure is to give tax incentives to the companies that build out the new systems. According to BusinessWeek, "those most likely to benefit would be existing broadband providers such as AT&T (T), Verizon Communications (VZ), and Comcast (CMCSA), because they have the capital to make investments, and it costs less to extend their networks than it does to build new ones." Comcast hardly needs the help.

10 Stocks That Will Keep Paying Dividends

See the rest at Newser, which also sources The New York Times.

And how were the banks making money by churning out mortgages? An Investopedia.com story gives a great summary of how selling banks mortgages on a secondary market was driven by Wall Street's interest in buying and reselling the debt:

The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more. The snowball began to build momentum...

A lot of the demand for these mortgages came from the creation of assets that pooled mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize these mortgages into bonds, which were sold to investors through CDOs.

You can read in greater detail about the fall out of poor oversight of CDOs and sub-prime lending here, here and here on The New York Times.

Related:
+Harlem Gets First Major Hotel Since 1967, The Aloft
+The Bankruptcy of Toni Braxton & The Return of Debtors' Prison

When the corporations with a responsibility to lend and manage loans responsibly admittedly hire totally inexperienced "Burger King kids" to do important work, a criminal act against society has occurred. Banks lend money to increase the prosperity of the nation that gives them that power. By law, banks in America are only required to hold 10% of the funds they lend in customer checking accounts as liquid assets (although the amount required is variable). The remaining 90% of their total assets can be used as capital by order of the Federal Reserve to loan money so that this money can grow.

When banks use this money to help one acquire the capital to buy a home, the idea is that the bank will get the money back plus interest. This interest allows the bank to make money and have money for more loans. Loans that can fund an education for better job opportunities, build a business that provides jobs, or help some one else buy a home that will accrue in value, expanding the wealth of the homeowner. Responsible lending helps everyone involved grow their money, for the overall prosperity of society.

When banks, the central institutions tasked with the job of doling out funds that can lead to stable economic expansion, mess up -- well you see the results. What we are experiencing is the result of a critical lack of leadership and accountability where it matters most. Sure, some people took out loans they perhaps should have known they could not afford. But they are not mandated by law with the responsibility to manage the funds keeping the engines of prosperity running. That job falls squarely on the shoulders of banks and bank regulators.

The truth is they royally screwed up, they knew they screwed up, and they didn't do anything about it when there was still time. These are harsh words, but I think it is very important to dispel the myth that poor people, mainly blacks and Latinos, who didn't know what they were doing, or programs meant to help them, are the cause of the housing collapse. Realizing the truth is the only way all Americans will remain vigilant, ensuring that banks and regulators do their jobs well.

How do you feel about this ugly truth rising to the surface? Will it change your trust of lending institutions?

Leave your comments below!