Left BehindPosted: August 22, 2011 Filed under: financial institutions, U.S. Economy, U.S. Politics | Tags: bad economy, bad housing market, foreclosure, HOLC, homeowners, housing crisis, mortgage-backed securities, SEC, Standard & Poor's, TARP 16 Comments
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.