Stealing HomePosted: October 10, 2010
One of the saddest perversions of our democracy has been stealth lobbying by huge and powerful industries to gain market power by extracting market-destroying laws from their donation-hungry political cronies. No where is this more apparent than processes impacted by the FIRE lobby. In industries where lobbying has been wildly successful, few remnants of true market capitalism remain. We shouldn’t worry so much about actual socialism. We need to worry about our current status as citizens suffering from the excesses of “lemon socialism” or what is also known as crony capitalism.
I wrote yesterday on how the perpetual bailouts of Depository Institutes and Investment Banks have created such a measurable moral hazard that I believe that markets now rally around the very thought that both the Fed and the U.S. Treasury will approach a stalled economy by reducing costs and increasing revenues to huge corporate institutions. Investors recognize a situation where their nests are about to be feathered with taxpayer largess. The Health insurance industry has seen its stocks increase–and indeed their premiums/revenues are skyrocketing–since the HCR law was passed with a clause to drive hapless consumers into their benefit-denying clutches.
Increased concentration in industries that only exist to create information asymmetries in markets–real estate agents, health insurance brokers, bankers–just drive a wedge of cost between the true suppliers of a service and their customers. Their fees siphon income from sellers and wealth from buyers. Their existence in any market signals that a market is not–in any sense–a functional market. They’ve managed to lobby themselves into an economic catbird seat. I am appalled whenever I hear politicians talk about the real estate market, the financial markets or the health care markets as ‘free markets’ when they themselves are enabling the fee-sucking middle men into the market and monopoly. It does not matter if a third party payer is the government (who should at least remain a nonprofit pass through) or a private company. As we’ve seen over and over, privatization of public goods leads to cost run-ups and moral meltdowns when the government lets foxes write the laws that govern the chicken coops. They’ve put the foxes in charge of the production of the eggs. What we’re getting are overpriced eggs with salmonella and chickens that wind up in the pots of a select few. They not only game the market, they cannibalize the infrastructure.
The current parasitic relationship between megacorporations and congress leads to setting up systems and processes that benefit the third parties that bring very little value-added to a market. They simply warp the resultant price and quantity outcomes. No where is this becoming more apparent than the current foreclosure debacles. The primary asset of most Americans has become a speculative gamble designed to bilk households of wealth, income, and shelter.
Congress is scrambling to correct issues in the real estate market that they created by enabling the root causes of the problem. Their solution is to enable bad business practices. Last week, they sent a law to the President’s desk that would virtually erase the purpose and sanctity of state notary laws. We’ve gotten to the point where the rules are so warped that we are enslaved in the debt markets when we enter into a lending contract. Policy makers have established a precedent of bailing out the last crooks standing in the market and throwing the voting and working public under the bus.
It has been evident to any of us that have actually studied predatory lending practices that eventually some shock to the market would collapse the Ponzi pyramid and that the crash would ripple through the economy for a very long time. We are reaping the results of years of lop-sided incentives. The same production line rubber stamping of poorly underwritten and originated mortgages is now throwing hapless homeowners into a process set up to fleece them. Attempts at policy to encourage modification have completely failed. Owners in foreclosure are being steamrolled through a process meant to strip them off their properties as efficiently as possible.
A bigger threat to the public welfare looms, if the government allows so many parcels of real estate to be seized, what will be done with the hundreds of thousands of properties sitting vacant? Will the government eventually buy these properties from banks with taxpayer money in lieu of helping families stay in the homes? Will whatever remains of homeowner equity be shoveled into the coffers of mortgage holders? There is something inherently evil about a government system that doesn’t hesitate to bail out bad business decisions but morally and legally censures citizens who lose their jobs, health care, and everything they have to a bad economy enabled by same said government and businesses. Why should the federal government enable landlord melodramas all over the country?
Some politicians are finally calling for a foreclosure moratorium now. What was needed at least three years ago and definitely over the last two was a system of dealing foreclosures similar to agency that did so during the Great Depression and during the 1980s thrift meltdown. What we’ve gotten is a bill that rips through state tort laws on contracts. Thank goodness the President pocket vetoed that bill, but where is the sensible policy to solve the problem? It is undoubtedly being checked by K Street Lobbyists as we speak.
Here are some details on foreclosures and home sales from the Christian Science Monitor.
The foreclosure foul-up promises to slow the pace of sales in a housing market where demand was already tepid. That’s because, of the transactions that are occurring, a high percentage (roughly 1 in 4 at present) involve sales of bank-owned homes. Document probes could delay both the pace of new foreclosures and the ability of banks to find buyers for homes that they have already taken over from delinquent borrowers.
Oddly enough, slowing down foreclosures would actually help the market in some cases because it could take a maximum of 25 percent of the houses off the market. This reduction in supply might also halt the worst of the fire sale properties leading to a stabilization of prices.
But again, there’s a bigger problem looming. Just look at these numbers, also from the CSM.
According to Amherst Securities, the nation currently has 5 million nonperforming home loans (60 days or more delinquent, or already in foreclosure). That’s about 10 percent of all homes with mortgages.
Also, a failure to address the legal concerns could mean lost confidence for many homeowners and potential homeowners.
“When homes are fraudulently repossessed, the housing market will suffer, particularly where homeowners have redemption rights and can demand the return of their homes if they were wrongfully evicted,” Mr. Cummings argued in his statement Friday. “Avoiding fraudulent foreclosure will keep the American Dream alive for many families and ensure that our national recovery is built upon a firm foundation.”
In addition to Bank of America, two other big lenders have halted foreclosure sales in 23 states, pending a review of the alleged problems: JPMorgan Chase and Ally Financial’s GMAC Mortgage unit.
These 5 million mortgages also sit in the toxic securities held by the Fed as pledges against loans provided at the Discount Window and many of these securities are undoubtedly sitting on the balance sheets of pension funds and other huge investment portfolios. My guess is that many of these may even sit in securities originated by Fannie and Freddie who still have their implicit taxpayer guarantee as they sit in their own bankruptcy purgatory. (Some how organizational bankruptcy is ‘good business’ while family bankruptcy is a symptom of moral turpitude.)
We have a clear indication that HAMP (a 2009 Obama administration attempt at some form of cram down) is a miserable failure as more and more of these mortgages wind up in this flawed foreclosure procedure.
As of July, only 422,000 mortgage modifications overseen by the government were considered permanent; half as many homeowners ended up like Reed, navigating a Kafka-esque approval process with nothing to show for it.
Now, Treasury officials are reportedly moving the goalposts.
Conceived as a way to get borrowers back on track, HAMP now seems to merely have allowed banks to delay facing their own problems.
“The number of trial and permanent modifications that have been cancelled substantially exceeds the number of homeowners helped,” a General Accountability Office report on the Troubled Asset Relief Program (TARP) stated in July. “One continuing source of frustration is that the Treasury has rejected calls to announce publicly any goals or performance benchmarks for HAMP.”
How could a program based on the seemingly commonsense idea that banks should renegotiate terms of underwater mortgages turn into a weapon of mass frustration?
That seemingly illogical situation can be traced to the tortured rationales behind the government’s housing-based efforts to stave off further U.S. economic decline.
Job one has been denial: keep delinquent mortgages off lenders’ books, prevent additional bank failures, avoid further bailouts, and pump up housing prices to keep builders working and consumers spending.
Hiding the truth about home values is something banks have been happy to play along with. Whereas foreclosures might take a few months in better times, banks and loan servicers are sometimes waiting a year or more to face the reality of mortgages gone bad.
“There’s a lot of phantom inventory that could be foreclosed in a twinkling, but they’re not,” says Mountain View attorney Cathleen Moran, a certified bankruptcy specialist who has helped many clients who have failed to enroll in the HAMP program.
The ratings agency Standard & Poor’s reported in June that it would take at least three years for banks to sell the foreclosed houses they’ve withheld from the market. That doesn’t include selling delinquent mortgages on which they’ve postponed foreclosure.
Instead of finding some way to force cramdowns, we’re seeing the Federal Government enable the foreclosure process by trying to sanctify the improper process. Now we hear that they’ve been warned about the foreclosure process for years.
In meetings and letters to the government, consumer advocates and lawyers accused the servicer industry of violating its agreements with the government to help slow foreclosures, saying it instead was structured to accelerate the foreclosure process.
“The message was that servicing needs to be regulated, and that the existing regulators of the servicers need to be on the job and needed to look at what has happened in the servicing industry,” said Julia Gordon, a lawyer with the Center for Responsible Lending. “If it had been mandatory for servicers to engage in some kind of evaluation of the loan prior to foreclosure, you’d have seen a much different outcome for many borrowers.”
Again, no effective policy exists for loan modification at this point. The system favors the financial industry. Consumer advocacy groups contacted the administration and congressional leaders repeatedly. So, why does it pay these guys to foreclose? A good set of reasons is included in the WAPO article cited above that was published today.
In general, servicers make more money when they foreclose on a loan than when they find a better arrangement for the borrower. That’s because the payments to the servicer decline when a loan is modified. But if instead the borrower is in default, the servicer adds fees on the account and can collect when the house is sold, even at foreclosure.
In addition, servicers are under pressure to continue to transfer the money paid by the borrower to the investor in the loan. When a borrower isn’t paying the loan, the servicer has to cover the difference.
Moreover, servicers can expect to charge more if they receive higher ratings from credit rating agencies. And the faster a servicer forecloses when loans are in default, the higher the rating they stand to receive.
So new businesses have emerged to accelerate the foreclosure process. Companies have launched electronic platforms that allow servicers to rapidly foreclose, quickly hiring lawyers to file necessary court documents in a process that is often divorced from the circumstances facing an individual borrower.
So, here I am,dredging up the differences in candidates from the 2008 primary again. There was a plan to deal with what’s occurring now three years ago. It came from then candidate for president, Hillary Clinton. Here is former President Clinton explaining some of its major points on Jan. 17, 2008.
“The American people, the tax payers, and the economy will pay more if we let all these mortgages collapse. Never mind the tragedy and heartbreak of the individual families,” Clinton said at Everett and Jones restaurant in Jack London Square.
Sitting amongst a panel that included Oakland Mayor Ron Dellums and other East Bay officials, Clinton said the mortgage crisis could get worse if the “larger economic crisis” leads the country into a recession.
“The national government tells us we’re in the seventh year of economic recovery,” Clinton said, while citing rising costs of healthcare, gasoline, housing and education going “through the roof.”
“We have created very few jobs, probably less than a fourth as many as we created in the eight years that I was President,” Clinton boasted. “And that is a big problem.”
Clinton stressed that a lack of job opportunities, as well as lenders packaging home mortgage loans and selling them to investment banks and hedge funds, has brought the country to a foreclosure crisis.
According to Clinton, presidential hopeful Hillary Clinton has a plan that would place a ninety-day freeze on foreclosures, adjust mortgage loans to five-year fixed interest rates, and “accelerate economic activity” by creating jobs in local communities with new energy policies involving building structures to be “as energy efficient as possible.”
“We’re going to be able to have jobs not just for engineers and architects, but for high-school dropouts who can be trained as green-collared workers,” Clinton said.
Golly, gee wilikers, Batman, some policy makers saw this coming and had an actual plan to benefit people. You’ll also see how this culture of ‘ownership’ targeted black and Latino households. They were overly subjected to the worst abuses. The real result of the ‘ownership society’ was to turn American families and their life savings into easy targets.
Here’s a few more tidbits from the same time period.
Clinton has publicly laid partial blame on Wall Street for the foreclosure crisis that many borrowers have found themselves in this past year. She pointed at the apathy of the Wall Street brokers who backed the mortgages that were inherently “designed to fail.” She one-upped President Bush’s plan that put a five-year freeze on sub-prime mortgages, which will provide both borrowers and the market time to catch up with a legally authorized delayed payment period of 90 days. Unlike Bush’s five-year freeze, Clinton’s would also extend to all sub-prime borrowers and even some who are late with payments. In addition, she asked that $7 billion be given to those sub-prime borrowers suffering the most from foreclosures. Clinton lambasted mortgage lenders for “aggressively” pursuing borrowers who did not know any better. Clinton insists that her plan is a “comprehensive work-out, not a bail-out.”
Clinton believes that, in order to strengthen the weakening economy, the Federal Housing Administration should “stand ready” to buy, restructure and resell failed mortgages. Her proposed plans include $30 billion in emergency funds for local and federal governments to for these purposes.
BTW, Axelrod inkled that the Obama administration opposes foreclosure moratoriums. I frankly suffer from common sense nostalgia when I read things like this.
Let me just say that a whole bunch of folks saw this problem coming from at least three to five years away and current policy makers were more than warned. What we have is a Treasury Secretary who is deeply embedded in the culture of Wall Street financing and sees and enacts policy from that viewpoint. We have not had policy that creates jobs or policy that stems the real estate problems that impact every one. What we have seen is policy that continually bails out the businesses that put us all into this situation. I cannot get fired up to vote for people that enable robber barons.
I posted this graphic down thread on my wonky thread yesterday but didn’t embed it so I will do so here. Hopefully, some of you will wade through enough of this thread to see how this graph should’ve sent off some signals that something was drastically wrong with asset valuation of houses years ago. In a period of time when real incomes of households were flatlined at best but mostly sinking, the median price of houses to median incomes ratio was skyrocketing. House valuations were beyond unrealistic, they were unsustainable, and the loans given to people to buy them were horrifyingly stupid. Any one that bought a house during the early 2000s was basically fleeced of their assets and futures. Why blame the home owners for overpaying when the real estate agents, the mortgage originators, and the financial markets told them every thing was A-okay.
One big question still haunts me. What are they going to do with all those foreclosed properties? Having lived in a community with thousands of decaying and neglected properties for five years now, I have seen first hand what happens when people are thrown out of their communities. When I drive the neighborhoods near Lake Pontchartrain and in East New Orleans, I still shudder at the sight of empty lots, vacant decaying houses, and ill tended abandoned properties that surround the one or two homes on the block where families still live. It costs money to light up, patrol and protect these Ghost Suburbs. I can’t imagine the psychological toll it must take on the folks that rebuilt and remain. There are no grocery stores, no pharmacies, no schools, no nearby hospitals or emergency clinics,and few gas stations. Businesses won’t build in semi-abandoned neighborhoods. While this was the result of Hurricane Katrina and the diaspora that resulted from empty promises of government to help us rebuild, I foresee the same wastelands in places like Nevada, Florida, and California from this foreclosure mess.
I’ve said this many times, but I’ll say it again. The economy is this country is driven by households who earn incomes and buy things. It makes up 67 percent of expenditures on all things produced. If you don’t provide a future for the majority of your citizens and spend your time obsessing on the possible taxation of folks who hold the majority of wealth, but do not form the majority of buyers of your economic value, your only future will be that of the banana republic.
We need leaders that understand basic economic principals and will boldly act on them. Geithner should be replaced with some one like Elizabeth Warren who understands the consumer side of the market equation. We need congress people that will stand up to lobbyists who seek monopoly power. We need both a Teddy and a Franklin Delano Roosevelt with the vision and moral strength to pursue laws that promote the general welfare. Until then, beware the fallout from crony capitalism.