Left Behind

The Great Recession of 2007-2008 took out some one in every sector of the economy.  Worst hit, however, was the housing sector where the financial contagion was hatched by folks betting on the forever upward trend in real estate prices.  Prices and sales of homes have plummeted. However, the government focused clearly on reviving the same group of people that were most responsible for the damage.  Both the Bush and Obama administrations have raptured Wall Street while leaving US families behind.  Granted, many homeowners jumped into loans they could not afford and bought houses at price levels that should’ve sent them clear warning symbols.  But remember, even the most sophisticated investors–like AIG and Lehman Brothers–got sucked into the mortgage and housing madness.  You can’t exactly expect every home owner to read through the fine print and look for trends in underlying home values using the Case-Shiller Index. Buying a home is an emotional process.  Investing is supposed to be the cautious practice.

So, what’s really different between this housing crisis and the two previous, similar crises that happened during the Great Depression and Savings & Loan crisis is that there is no vehicle to redress homeowners’ wiped-out balance sheets and foreclosure problems.  There has been largess all over the place for banks and other financial institutions.  During the 2008 elections, then-candidate Hillary Clinton emphasized the important role of the HOLC during the Great Depression and argued that something akin to it should be considered today.  The purpose of the HOLC was to renegotiate mortgages so that people could stay in their homes.  The HOLC was dismantled in 1951 when the last of its assets–dating from as late as 1935–were liquidated.

There were some efforts by the Obama administration that accompanied the Bush 43 TARP program to try to get private financial institutions to renegotiate loans in lieu of foreclosure, but those programs have failed miserably.  At least the SEC is beginning to look into possible criminality leading to the financial crisis like the role of rater Standard & Poor’s in overrating toxic mortgage-backed securities. Still, the victims of these practices have had little to no relief.  The NYT reminds us today that many homeowners need help. We should be further reminded that the overall economy will not improve until the housing market stabilizes.

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.

Instead of pushing the banks to do what is needed, the Obama administration has basically urged them to do their best to help, mainly by reducing interest rates for troubled borrowers. The banks haven’t done nearly enough. In many instances, they can make more from fees and charges on defaulted loans than on modifications.

The administration needs better ideas. It can start by working with Fannie Mae and Freddie Mac, the government-run mortgage companies, to aggressively reduce the principal balances on underwater loans and to make refinancing easier for underwater borrowers. If the president championed aggressive action, and Fannie and Freddie, which back most new mortgages, also made it clear to banks that they expect principal reductions, the banks would feel considerable pressure to go along.

The housing numbers are chilling. Sales of existing homes fell in July by 3.5 percent, while prices were down 4.4 percent in July from a year earlier. In all, prices have declined 33 percent since the peak of the market five years ago, for a total loss of home equity of $6.6 trillion.

There’s no letup in sight. Currently, 14.6 million homeowners owe more on their mortgages than their homes are worth, and nearly half of them are underwater by more than 30 percent. At present, 3.5 million homes are in some stage of foreclosure. Nearly six million borrowers have already lost their homes in the bust.

There are 10 states where basically no one is buying a house. That’s a pretty good indicator of a still sick market. What’s most appalling is that on top of these statistics comes the story about how much money the creators of both the housing bubble and the housing crash were bailed out by both the FED and the Federal Government.  The FED’s main purpose is to stabilize the financial system and thet basically did what they had to do under the charter they were given, but the numbers are beyond astounding.   None of these institutions were punished for their bad decisions or fined.  The SEC and the FED seem toothless in the face of such perfidy.

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

The FED is mandated with stabilizing the financial system.  It’s sole connection to borrowers is to ensure truth in lending laws are applied which still leaves borrowers stuck reading the fine print.  The  Federal Government, however, has a completely different mandate.  There’s a lot of fuzziness surrounding the idea of  promoting the general welfare.  I’m pretty sure that letting business put a market on steroids then helping them recover while letting home owners swing in the wind isn’t promoting any one’s general welfare.   However, the government has chosen to stabilize mortgage investors while still leaving the actual market for houses in a declining state.  Then, they wonder why the economy is so bad.  Folks with declining incomes and wealth do not go on spending sprees.  They retreat.

There is so much unfinished business left over from the 2007-2008 financial crisis it’s hard to know where to start the complaints.   It’s one of the major reasons for budget shortfalls all over the country.  But, you wouldn’t know that if you listen to political rhetoric.  Again, undoing the damage that caused the problems from the start would be a lot more judicious than creating additional ones. We don’t need deficit commissions.  We need to deal with the root causes of the current deficit.  That would be too many wars, too many tax cuts, and way too many people who don’t have jobs and homes because Wall Street broke the economy.

16 Comments on “Left Behind”

  1. Bryan Griest says:

    “We need to deal with the root causes of the current deficit.” Yes, a 1000x yes. And part of those roots is the political sickness we have in the country as well. Like how it is impossible for a pol to even mention “raising taxes”, even though it is painfully obvious that this is what is needed, and get elected. Or to think they can get elected, because I think that if someone came along with the fortitude to say that we need to pay for what we want, and how we pay for what we want is “taxes”, that person can still win.

  2. djmm says:

    Excellent summary!! Which presidential candidates would hold the perps responsible? If a candidate, even a third party candidate, ran on such a platform, plus for helping homeowners, I bet they could win.


  3. madamab says:

    I knew New York was one of those states. Checking out homes on Trulia in my area is truly eye-opening. These houses are in beautiful, desirable locations and not one of them is moving. The prices keep going downward and downward.

    I feel terrible for people who got suckered in by the real estate scams the mortgage lenders were running. This was not a crisis caused by a few irresponsible borrowers – it was the lenders who created these loans who are at fault.

    A woman I worked with in 2008 said that she used to be a loan officer in the 70s and 80s, and that the loan standards were strict and simple back then. It was just an income-to-debt ratio – if 25% of your gross income could pay the mortgage, you were qualified. (Sometimes they used 30% too.)

    Had these standards not been destroyed, the crisis could never have happened, and I’m willing to bet that housing prices would never have ballooned the way the did either.

  4. foxyladi14 says:

    blame acorn.and those mac kids ::evil:

  5. Thingumbob says:

    It is pretty apparent now that these bailouts were immediately put to work speculating on commodity futures. See Bernie Sanders leak of CFTC info

  6. bostonboomer says:

    Great post! What we need is presidential leadership. Anyone know someone who could provide it?

  7. bostonboomer says:

    Lloyd Blankfein of Goldman Sachs hired a high profile criminal defense attorney


  8. bostonboomer says:

    Baby Boomers are now being blamed for holding down stock prices for decades to come.


    • bostonboomer says:

      We might as well all shoot ourselves right now. We’re going to be vilified until we die anyway.

    • dakinikat says:

      They’re just looking for excuses for the markets crappy performance recently. They still want our Social Security funds to beef up their fee income.

      • ralphb says:

        Yes they do want those social security funds. It’s always been apparent, or should have been, that when baby boomers reached retirement age their purchases of stock would largely stop. When cashing in the 401K, something has to replace those billions. I have thought for years that was Pete Peterson’s game with the Concord Coalition and all the follow on garbage like the catfood commission.

  9. ralphb says:

    Question. Will it take a revolution to get the country out from under the thumbs of the banksters and other finance crooks? I think the answer may be yes.

    • paper doll says:

      you are right, and not just this country , but the world. Because the system in place is bankrupt.