Citizens For Financial Responsibility
There is rampant, outright fraud in our financial system. Through a number of schemes various institutions are sacrificing the markets’ integrity and financial strength while undermining the credibility of The United States as the world’s leading economy.
We the undersigned call upon you to address the following issues:
- Congress must prevent lending against unverified (“stated”) income or assets, prohibit “Option” (negative amortization) mortgages, ban prepayment penalties and require conservative, proven mortgage practices be followed, including but not limited to the requirement that borrowers be qualified at the highest rate a mortgage can reset to over the life of the loan and the “back end” ratio (DTI) on all mortgages not exceed 36%. An important first step is to hold The Federal Reserve and all lenders accountable under the existing 1994 Homeownership Equity Protection Act and greatly improve consumer disclosures. In recent years mortgage lending has become increasingly aggressive and predatory. A front-page Wall Street Journal article on October 11th documents that fully one quarter of all mortgages made in the last three years were at “high interest rates” – in other words, subprime – and most combined multiple risky features, such as qualifying on a teaser rate and negative amortization. This predatory practice was largely responsible for the severity of the housing bubble and, now that it has burst, is responsible for the economic pain that middle class Americans are experiencing. By causing house prices to increase at an unsustainable rate lenders have stripped trillions of dollars of real wealth from Americans for their own profit, leaving our citizens with a sea of debt, foreclosures and ruined credit. Even today banks are advertising toxic “debt bomb” Option ARM mortgage products on national cable networks. Existing laws already ban most of these risky practices – they have not been and to this day are not being enforced.
- Congress must amend the appropriate sections of US Code and Regulations so that all mortgage deficiency judgments can be discharged in personal bankruptcy, that all “short sale” differentials are exempt from taxation as “income”, and that all GSE-backed mortgage loans are “non-recourse” loans. Homeowners are the only ones who can be somewhat protected from what is to come, and this change will do so by allowing them to discharge mortgage debt and not be penalized for “short sales” that are undertaken to escape from “debt bomb” predatory mortgages. By making all GSE-backed loans “non-recourse” and barring short sales from being treated as “capital gains” originators will be further encouraged to apply conservative lending practices.
- Congress MUST NOT bail out – under any circumstances – mortgage companies and investors who voluntarily entered into risky mortgage and derivative contracts during these last several years due to lax lending standards, poor due diligence or as a matter of business policy. Failure must be allowed irrespective of the damage done to these firms, because only financial failure serves as an effective check and balance against excessively risky behavior and greed. The practice of intentionally making problems “really big” in the smug knowledge that you can take ill-gotten profits and lay off the risk on society has led to a series of economic disasters that have been “charged off” on the American Taxpayer, going back to the S&L Crisis.
- Congress must act to ban all off-balance-sheet “conduits”, SIVs and similar schemes, and require that any and all liabilities be properly and completely reported both to regulators and shareholders. These vehicles create an intentionally-false view of firms’ financial condition. In effect, these vehicles serve to fraudulently manipulate a bank’s balance sheet by hiding debt. These are the same accounting tricks that were instrumental in Enron’s bankruptcy. Now, on the front page of the Wall Street Journal (October 13th) we learn that Secretary Paulson is actively involved in attempting to expand this deception!
- Congress must exert its Constitutional authority to regulate the banking system and demand that the Federal Reserve immediately revoke six recently issued “23A Exemption Letters.” The Federal Reserve, in addition to “looking the other way” with the “SIVs” and “Conduits” referenced above, recently granted six large banks an exemption from one of the last pieces of Depression-Era banking regulation – “Regulation W” – which prohibits more than 10% of a bank’s regulatory capital being allocated to a single affiliate. These “23 A Exemption Letters”, in tripling the allowed exposure, circumvented the “safety systems” intended to prevent another banking crisis caused by these irresponsible practices.
- Congress must exert its Constitutional authority to regulate our currency and demand that the Federal Reserve immediately reverse the recent rate cuts. The Federal Reserve recently lowered the Federal Funds Target as well as the Discount Rate. Those who are on fixed incomes such as Social Security are told that they have “2% inflation” in their indexed checks, yet their food, energy and health care costs are all rising at more than ten percent a year due to inappropriately-low interest rates. This intentional “pushing off” of lower standards of living to people who are unable to defend against it – retirees on fixed incomes – is unconscionable. The bond market, discerning that The Fed abdicated its responsibility to control inflation, reacted by increasing real interest rates on mortgages and other “long-term” money, the exact opposite of what consumers expected. It is imperative that the Federal Reserve’s lawful mission – monetary policy that fosters “pursuit of full employment and stable prices” – be actually adhered to.
- Congress must act to aggressively prosecute both those who “leak” inside information and those who trade on it. If the SEC and U.S. Attorney’s offices will not start investigating these violations of the law, Congress should call for a Special Prosecutor. If we expect Americans (and the rest of the world) to trust our financial markets the defense of their integrity needs to be taken far more seriously than it has been. One particularly outrageous example is the apparent need a loan program with the Federal Funds discount rate announcement on August 17th 2007. There is a clear and apparent pattern of trades leading up to the time of the announcement which strongly suggests that some insiders were “tipped” that an unscheduled Federal Reserve action was about to be taken. In addition, the response to a recent FOIA request appears to further suggest that the Federal Reserve did in fact have multiple conversations with market participants who likely placed trades prior to the official announcement and profited thereby.
Addressing these issues as suggested will not solve all of our impending economic problems, but they will provide a level of safety, transparency and sanity that has been sorely lacking in our economy over the last several years.
A comprehensive explanation of details behind this petition can be found at http://financialpetition.org/petition.pdf)
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