HAMP

DeMarco Speaks! (With Closed Captioning For the Mortgage-Impaired)

Richard Eskow — Wed, 11 Apr 2012 01:10:11 -0400

Edward DeMarco is the beleaguered bureaucrat in charge of an agency called the Federal Housing Finance Agency. And because the FHFA is now managing Fannie Mae and Freddie Mac, DeMarco's in charge of most American mortgages. He's been the target of resignation demands for weeks. Everyone from Tim Geithner on down - and therefore presumably President Obama, too - has singled out DeMarco as the one person standing in the way of relief for millions of American homeowners.

DeMarco's still an unelected ideologue with too much power, and he still needs to go. But today, after remaining silent and refusing to share some of his technical information with members of a Congressional oversight committee, the previously Garbo-esque Ed DeMarco finally spoke up today. His speech at the Brookings Institution was technical in nature, but to anyone with the right political or emotional closed-captioning device the message was loud and clear: Don't rush me, Mr. President - and find yourself another fall guy.

And to anyone who's underwater on a mortgage the message was even clearer: You're not getting much help from me.

Using material from his prepared text, we now present the remarks of Edward DeMarco - with closed captioning provided for the mortgage impaired:

WHAT DEMARCO SAID:

"I will not be announcing any conclusions today - our work is not yet complete - "

WHAT HE MEANT (closed captioning):

What's the hurry? It's only been three years, eleven million underwater mortgages, and lost housing value that exceeds seven trillion dollars. We'll get around to it eventually. I promise.

WHAT DEMARCO SAID:

" ...but in view of the state of the public policy debate on this subject ..."

WHAT HE MEANT:

The public pressure is finally getting to me ... and maybe even to my political patron on Capitol Hill, Sen. Richard Shelby.

(Shelby's the Republican from Alabama who has abused Senatorial privilege for three years by refusing to allow a hearing on Obama's nominee for DeMarco's position as head of the FHFA. That's left DeMarco in place as Acting Director for quite a while now.)

WHAT DEMARCO SAID:

" ... , I am pleased to have this venue to enhance the public understanding of this difficult question and to explain how FHFA has approached the matter."

WHAT HE MEANT:

I'd rather sound like i'm glad for the chance to educate the public than like someone who's been getting heat for weeks now - heat that's finally getting to me.

WHAT DEMARCO SAID:

"I set the context by reviewing FHFA's legal responsibilities as conservator."

WHAT HE MEANT:

I took over Fannie and Freddie after Republicans and so-called "centrist" Democrats privatized them - an act which destroyed them when their greedy executives behaved like sheep and followed the irresponsible example of Wall Street's banks.

And I'm continuing to interpret my role as strictly one of restoring them to fiscal balance, not as that of someone who as a government official must also ensure they succeed in the mission for which they were created - which, as one of their websites tells us, is to "Meet the needs of the mortgage market by making homeownership and rental housing more affordable; Reduce the number of foreclosures; Helping families keep their homes."

That part doesn't interest me.

WHAT DEMARCO SAID:

"Clearly, many households got over-extended financially. Some accumulated debts they couldn't afford when hours or wages were cut or jobs were lost. Others withdrew equity from their homes as house prices soared. Others bought houses at the peak of the market, often with little money down, perhaps in the belief house prices would continue to climb ..."

WHAT HE MEANT:

... and they got what was coming to them. Bailing out these irresponsible so-and-so's would reward the undeserving - although it wasn't unreasonable to bail out the banks that persuaded them to do all the things I described, and which inflated the values of their homes and used deceptive booking to persuade many of them to do it.

WHAT DEMARCO SAID:

"Yet there are other Americans who did not do these things. There are families that did not move up to that larger house because they weren't comfortable taking the risk. Perhaps they had to save for college or retirement, and did not want to invest that much in housing."

WHAT HE MEANT:

So why rescue the gamblers and freeloaders? Of course I don't have any data to prove that struggling homeowners did anything wrong, but I have something better: ideology. With ideology you don't need proof.

WHAT DEMARCO SAID:

"And there are people working multiple jobs, or cutting back on the family budget in many ways, to continue making their mortgage payments through these tough times. Many of these families are themselves underwater on their mortgage, even though they may have made a sizeable down payment."

WHAT HE MEANT:

Your heroes, the very Administration that's demonizing me, only seems to be proposing that we help people who have actually gone delinquent on their mortgages. But that's not fair to all the underwater homeowners who haven't gone delinquent.

(He's got a point: From recent remarks on C-SPAN it's clear that HUD Secretary Shaun Donovan is focused only on reducing principal for delinquent borrowers and not anyone else. That's an approach which helps irresponsible banks but leaves the vast majority of duped homeowners high and dry - even when homeowners were duped into taking out loans that were too big by a bank that used dishonest appraisers. That's not fair - and suggests greater concern for bankers than for homeowners.)

WHAT DEMARCO SAID:

"Indeed, the majority of those most hurt by this housing crisis did nothing wrong - they were playing by the rules but they have been the victims of timing or circumstance or poor judgment."

WHAT HE MEANT:

I'm an ideologue, but I'm not a complete dick.

WHAT DEMARCO SAID:

"The first modification program the Enterprises use to evaluate a borrower is the Administration's Home Affordable Modification Program, or HAMP."

WHAT HE MEANT:

You know HAMP, don't you? That wildly unsuccessful program, the one that's helped banks and shafted a lot of homeowners? The one that's run by Tim Geithner, the guy who says I'm the problem?

If Geithner and the Administration are doing such a great job, then you should be pleased to know we're going right along with them. But if we're eff-ups, then they're eff-ups too.

WHAT DEMARCO SAID:

"While mortgages owned by other financial institutions or held in private label mortgage-backed securities have a much higher delinquency rate than those owned or guaranteed by the Enterprises, the Enterprises have been leading national foreclosure prevention efforts."

WHAT HE MEANT:

We're a government enterprise, and we're running circles around the private sector when it comes to meeting our goals. There are some functions that government performs better. (Wait! That came out the wrong way. I didn't mean to say that!)

WHAT DEMARCO SAID:

"Fannie Mae and Freddie Mac own or guarantee 60 percent of mortgages outstanding but they account for only 29 percent of seriously delinquent loans ... "

WHAT HE MEANT:

And your pals in the White House aren't exactly sweating the banks over this stuff, are they? Just poor old Ed.

WHAT DEMARCO SAID:

"Foreclosure prevention efforts are not the only form of assistance to borrowers. For borrowers who are current on their loan and not in imminent default, FHFA worked with Treasury and the Enterprises to develop the Home Affordable Refinance Program (HARP)."

WHAT HE MEANT:

Like I was saying, Timmy Geithner's not carrying his weight around here. Why don't you liberals go sweat Timmy for a while and give me a break?

WHAT DEMARCO SAID:

"In the original HAMP, principal forgiveness has always been permitted, but was rarely used."

WHAT HE MEANT:

That's Geithner. G-E-I-T-H ...

_______________

DeMarco then provides some reports and statistics. He also suggests that their previous attempts to analyze the problem were inadequate and offers a glimpse of their new corrective methodology - methodology which still looks to me like it will understate the problem (e.g. he says they'll lower FICO scores for modeling purposes from what they were at the time the loan was issued - but only by 100 points, which doesn't seem like nearly enough to reflect the reduced circumstances of many underwater and struggling homeowners).

DeMarco continued to insist that his primary, if not only, responsibility is to cut Fannie and Freddie's losses. But that position was undercut by the fact that he acknowledged that relieving principal as the Administration has requested would save his enterprises $1.7 billion. Yet he says he's still studying the issue.

DeMarco's right about one thing: it's wrong to step in only when a loan is delinquent. Personally, I agree with Stephen Lerner: All eleven million underwater homeowners should be helped. That's been my position for a while now.

There may be as strong an economic case for helping them as there was for helping Wall Street - and morally the case is much, much stronger. On a practical note, not helping them creates the threat of increased delinquency that DeMarco says he's worried about - although he would probably not endorse this solution.

Sadly, the Administration doesn't appear to endorse it either. Until they do there will always be a structural flaw with anything they propose - a flaw which DeMarco has found and will probably continue to press them about.

One other point: Fannie and Freddie, and therefore the taxpayer, don't own all of these loans. They own some, and they guarantee others with taxpayer money. And every solution discussed so far uses taxpayer money to rescue banks from the fiscal consequences of their own bad behavior. That's a pattern that needs to change.

DeMarco wound up his remarks with these words (we now resume our closed captioning):

WHAT DEMARCO SAID:

"FHFA remains committed to working with the Administration and Congress on these difficult questions, recognizing our shared objective of preventing avoidable foreclosures, minimizing taxpayer losses, and bringing a greater measure of stability to housing markets across the country."

WHAT HE MEANT:

Asking banks to take responsibility for their actions in the mortgage market? That's not on my to-do list - and it doesn't seem to have much of a place on the Administration's, either.

WHAT DEMARCO SAID:

"Thank you for inviting me here today."

WHAT HE MEANT:

It sure beats talking to that Cummings guy. Now will you people please go bother Geithner for a while?

By the Time You Read This: Why the Mortgage Crisis Dwarfs Almost Everything

Richard Eskow — Thu, 31 Mar 2011 01:52:29 -0400

The mortgage crisis in this country doesn't get much attention in Washington these days, but it's huge. It's so huge, in fact, that it dwarfs most of the economic issues that have Washington in their grip. It's so huge that it's dragging down our entire economy. It's so huge that the numbers can be difficult to picture.

The scale of the crisis is, in a word, staggering.

Here are seven charts (and another that was borrowed from the Wall Street Journal) along with some facts and figures that will help sketch out the scope of the problem. The numbers that follow are most likely understated, if anything, because we've left out some forms of reduced spending (like that which takes place when homeowners who have paid off their mortgages lose home value.)

The budget cutters push the idea that there's a dichotomy between the heart and the brain, and that they're on the "brain" side. But the numbers don't lie: Ignoring the foreclosure crisis is both heartless and brainless.

See for yourself.

By the time you read this ...

How big is the mortgage crisis? Pick an adjective: astronomic, colossal, enormous, gigantic, ginormous, humongous, jumbo, mammoth, massive, monstrous, mastadonic, monumental, prodigious, tremendous, vast, very big, very large, whopping. Here's how big it is. Let's assume that you're reading these words one day after I wrote them. That means that:

By the time you read this, there will have been approximately 8,500 foreclosure actions in this country [1] - more than one thousand every hour during the working day.

By the time you read this, homes in the United States will have lost more than $13 million dollars in value. [2] During a 24-hour day, this figure comes out to more than $500,000 an hour.

By the time you read this, homeowners will have paid $750 million in mortgage payments for non-existent housing value- that is, the amount on their mortgages that disappeared when the bubble burst - according to our estimate. [3]

By the time you read this, the nation's bankers will have earned nearly $400 million, of which $56 million will be bonus money. [4] Bankers like to say they work 24/7. (They don't, but let's say they did.) That means they will have collectively earned more than $16 million in salary and more than $2 million in bonuses during each and every one of the 24 hours hours before you read these words - morning, noon, and night.

And all of these figures for the last 24 hours will be reached again during the next 24.

Federal Spending vs. the Mortgage Crisis

How do the deficit and the mortgage crisis compare economically?

Here's a fact for you: The amount of wealth American homeowners have lost over the least three years is much larger than this year's entire Federal budget.

Even our conservative estimate shows that the debt that homeowners are paying off to the banks for no-longer-existing home value - "money for nothing" - is greater than the entire projected Federal deficit for 2011.

[5]

Those figures could be a little misleading, since they compare a multi-year problem with a single year's Federal budget. So let's look at the mortgage crisis and its impact on 2011. This year's estimated "money for nothing" payments dwarf the annual spending cuts that Washington's fighting over right now:

They're greater than this year's projected savings from the President's spending freeze, and much greater than the $30 billion in additional spending cuts which House Republicans initially demanded (and which they're likely to get.)

What is the "Homeowner Bank Bailout"?

The first column represents my quite rough (but very conservative) estimate of the payments that consumers will make to banks in 2011 for home value that's evaporated. That's money to repay loans which banks often knew were likely to go bad when they issued. (If they didn't know, they should have.) After their generous bailout (which was must costlier than has been acknowledged), the banks are still collecting payments for that portion of the loan that covers assets which no longer "exist."

That amounts to an additional, invisible annual bailout every year for the US banking industry, funded by some of the people who can least afford it: struggling homeowners. [6] (This figure doesn't even include people who've been foreclosed upon, which means the bank got to keep everything they'd paid into the house - and got the house, too.)

The "homeowner deficit" is strangling the country as the financial sector drains money from the overall economy for its own non-productive coffers. This chart illustrates that by showing that banks are once again grabbing an unhealthy share of our national wealth:

Source: Kathleen Madigan, Wall Street Journal

Without this drain, homeowners would be pumping hundreds of billions of dollars into the economy every year. Now that would be a stimulus.

Entitlement Cuts: Misguided Missiles

Instead of addressing the mortgage crisis, politicians (and the journalists who love them) are fixated on entitlement programs. How much sense does that make in dollars-and-cents terms?

The Best Stimulus: Homeowners or Corporations?

What's the best way to stimulate the economy: By giving corporations tax breaks and regulatory relief, or by fixing the housing crisis? Both political parties are turning themselves inside out trying to please corporations - partly, they say, because reports say those corporations are sitting on nearly $2 trillion in cash. If we make the CEO's of those corporations "feel better," the argument goes, they'll cut some of that cash loose for hiring and investment and the economy will pick up.

Let's look at that $2 trillion in comparison to lost housing value, and to our estimate of the mortgages being paid on lost housing value:

Those corporations won't really cut that cash loose until they know there are customers waiting to buy their products. There's a great way to make that happen: by helping consumers (more than 20 million households altogether) escape the burden of all this underwater debt.

Less Is Less

The Administration's response to this crisis has been woefully inadequate ... and the Republicans are much worse than that. The GOP's hard at work trying to end any assistance for underwater homeowners.

Administration programs were insufficient by design and then failed to meet even their own, overly modest goals. The HAMP program, for example, was never intended to help all of the homeowners who are still paying underwater mortgages. It should have been. Here's how limited its goals were, when compared to the problem:

But even when compared to the number of homeowners facing foreclosure, it's been a failure:

It hasn't even spent more than a tiny fraction the money allocated to it!

And yet, incredibly, Republicans want to cut it. And the GOP's Congressional leaders also want to kill several other programs for struggling homeowners, including a principal relief program that might help some of the 14 million underwater homeowners who haven't yet missed a payment.

Source: New York Times

Small Talk

Despite the magnitude of the mortgage crisis, all we've been hearing out of Washington is endless chatter about "deficit emergencies," the need for so-called "entitlement reform" (aka cuts), and the supposed "financial Armageddon" that faces us. [7] We've heard almost nothing about the crisis that is ruining millions of lives, costing us millions of jobs, and strangling the economy.

And by the time you read this, that won't have changed.

_______________

FOOTNOTES:

[1] Based on February's rate of foreclosures, rounded down to be make the estimate conservative. Foreclosure actions are defined as foreclosure filings and the sale of foreclosed homes.

[2] Based on January's price decline of 2.5% in total value, divided by a 30-day month, using an estimated total residential real estate value of $16.3 trillion that was derived from Federal Reserve data.

[3] A very rough estimate. Assumes that roughly half of the total housing value lost in the bubble is included in mortgage principal that's still being paid off (as opposed to foreclosures, etc.) This figure was derived from that amount, plus a rough calculation of the interest being paid and some assumptions about the remaining lifetime of the loan.

[4] Based on reported 2010 figures.

[5] It's a critical battle, of course - especially to the people who are counting on the government to serve its function in time of need. This piece addresses our warped financial perspective, not the very vital role government plays in our lives. That should not be in question (although it is).

[6] But wait, as the ads say: There's more. These homeowners can't refinance, either, because they don't have collateral (the houses aren't worth as much as the new loan). Alll the "quantitative easing" in the world won't touch them. So the banks are borrowing money cheaply and collecting it from these struggling borrowers at higher rates. [6]

[7] Nobody disagrees that it will be important to address the the Federal deficit over the long term, and Social Security's funding issues will need to be addressed before 2037, when the program will only be able to fund 75% of its planned benefits. (Any plan that cuts those benefits below that amount, or cuts them by that amount even before 2037, is a hoax designed to raid the money that working Americans set aside for that program.)

_________________________________________________________

This post was produced as part of the Curbing Wall Street project and the Strengthen Social Security campaign.

Foreclosures and Guilt: The "Home Loan Moral Hazard Scorecard"

Richard Eskow — Mon, 18 Oct 2010 02:45:07 -0400

Jamie Dimon and the other mega-bankers who derailed the economy have a new PR campaign to sell you. They're saying that families who can't pay their mortgages must bear the blame - all the blame - for the foreclosure crisis. That means the public should just ignore banks' widespread lawbreaking in the registering and transfer of property titles. For the bankers who would appoint themselves the nation's moral arbiters, It's always somebody else's fault.

Not that we should be surprised. After all, the Mortgage Bankers Association, which calls itself "the voice of the real estate finance industry," did a short sale on its Washington DC headquarters which left CEO John Courson uncharacteristically speechless. It seems he didn't want to talk about how he walked away from the loans he took out to buy that building. But before the cat got his tongue, Courson managed to lecture homeowners on their "legal obligation" and the terrible "message they would send" by walking away from their mortgages.

Morality and law for thee, but none for me.

John Courson paid $79 million for his Association's headquarters and sold it three years later for $41.3 million. In his defense, anyone who loses nearly $38 million on a single real estate deal is, in fact, uniquely qualified to speak for the real estate finance industry. They mismanaged their finances so badly that they brought down the economy. They needed to rescued by the rest of us, a privilege they're working overtime to deny others. They claim that struggling homeowners are "undeserving" of help, even if the other party in their transaction has broken the law or violated a contract.

The bankers have benefited from a stacked deck, or what's known as "moral hazard." That's the term for what happens when people don't bother protecting themselves from risk because they know somebody else will take care of it for them. The banks are saying they've been reasonable business partners, giving their borrowers all the information they need to make good decisions while asking no special favors for themselves. Does that sound right? We created the "Home Loan Blame Game Scorecard," which is at the end of this post, to find out.

As CEO of JPMorgan Chase, you'd think that Jamie Dimon might hesitate before saying "We're not evicting people who deserve to stay in their house." His argument rests on the idea that homeowners bear sole responsibility for taking out loans they couldn't repay. He might be shocked, shocked, to learn that his own employees have relentlessly been trying to push these loans on people:

The "blame homeowners" argument is hypocritical, but it's been effective. It helped bankers get themselves massive bailouts, pay themselves huge bonuses, and walk away with the profits they made by selling and trading these mortgages at inflated prices. And it's helped them avoid having to write down their books to reflect the actual, reduced value of the assets they're holding. That means millions of homeowners are propping them up by paying mortgages at property values that the banks themselves artificially inflated.

Now they want to use the same argument to get around the fact that they've been breaking property laws on a massive scale for years. It's just "paperwork," they say. But any homeowner who filed false affidavits - a crime that's legally equivalent to perjury - would be looking at jail time. Remember: Law and morality for thee ...

"But if these people had paid their mortgages, there wouldn't been a problem." That's a pretty compelling argument (if you're willing to ignore the widespread lawbreaking by the banks). But why couldn't they pay their mortgages? In many cases, it's because banks have violated HAMP rules for helping distressed homeowners modify their loans. That's breaking the law.

As the Wall Street Journal reported last week, the banks are "largely unsympathetic" to the idea of a foreclosure freeze, and they consider reports of widespread lawbreaking merely a bureaucratic problem. ""If you didn't pay your mortgage, you shouldn't be in your house," said a portfolio manager at Greenwood Capital Associates. "People are getting upset about something that's just procedural."

"Procedural" ... you know. Abiding by the law. Doing what the little people do ...

Bank of America has been a particularly egregious violator of HAMP's legal requirements, which means that many of the people it's foreclosing on shouldn't even be in that position. Yet you could almost see CEO Brian Moynihan rolling his eyes sarcastically as he said of the missing titles, "We'll go back and check over our homework one more time."

Please, Mr. Moynihan, don't trouble yourself. Allow us to check your "homework" for you. Surely bankers that hold homeowners to such high moral standards won't object to a thorough and very detailed audit of these transactions by the proper authorities. I'm sure such ethical and meticulous leaders want to know how many home appraisals were carried out by "friendly" appraisers, for instance, rather than ones who were known to come up with whatever number the bank wanted. And I'm sure they'd want to know if any of their employees had misled borrowers, perhaps by telling them that they could be sure that refinancing would be available long before their adjustable rate mortgages went up.

Remember, they're lecturing homeowners for not managing their finances well, when their entire industry would have collapsed because they didn't manage their finances well.

In a famous (and probably apocryphal) story, it's said that FDR finally got frustrated during a meeting of his economic advisors. After hearing talk about loan rates, interest, borrowing, and various financial mechanisms, the story says that FDR finally blurted out "What the hell! It's all our money, isn't it?"

That's how bankers feel about the current foreclosure crisis: It's all their money. Who cares about titles and property laws? If a homeowner hasn't been making their mortgage payments, the argument goes, then surely they should lose their house to somebody . It doesn't matter whether its Chase or Citi or Wells Fargo. As long as the banks agree among themselves who gets to put that family into the street, what's it to you, pal? And if the family's only in trouble because their bank (whoever it was) broke the law, well, we can't blame the bank if we can't find them, can we?

We're not saying that no homeowners bear responsibility for defaulting on their mortgages. Sure, some people should've known better. But three million homes have been foreclosed upon in the last three years. That's a systemic problem. One in every five houses is underwater. That's a systemic problem, too. The only factors common to the system as a whole are the bankers, and the rules that let them get away with running up housing prices in a gambling frenzy and walking away with everything when they fell. They've written millions of loans without proper risk management. Many experts were warning us that the housing bubble was about to burst, and they were getting paid extraordinarily well to understand the dangers.

Bank stocks took a steep hit last week, and why shouldn't they? The executives running them aren't very good at what they do. It's about time bankers took some responsibility for their failures. It's about time banks shared some of the lost value of these properties with homeowners - not just those who are defaulting, but all affected homeowners.

Stockholders should can the executives who have so badly mismanaged their banks. To paraphrase Jamie Dimon, we're not about talking evicting people who deserve to stay in the corner office. Word to Brian Moynihan: If you can't manaqe your business, you don't deserve to keep your job. Nothing personal, of course. For those who want to see the finance industry run by competent people, firing you is what we would call "just procedural."

______________________________

MEET THE HAZARD MASTERS: THE HOME LOAN MORAL HAZARD SCORECARD

HAZARD	BANKERS	HOMEOWNERS	ADVANTAGE:
Were financial professionals	Yes	No	Bankers
Cheated on property laws, taxes, titles, etc.	Yes	Mostly no	Bankers
Got rich off the deal	Made trillions	Some got to buy boats or flat-screen TVs	Bankers
Acted as unfair trading partners	Yes; had FICO, databases, teams of economists	A few hid things, but the banks knew anyway	Bankers
Could influence politicians with fat campaign contributions	Yes	No; never attended $20,000/plate fundraising dinners	Bankers
Able to influence public opinion with PR campaigns, etc.	Yes	No	Bankers
Absolutely shameless about blaming others for financial mismanagement after accepting massive bailout	Yes	No; most feel guilty about missing a payment and ashamed if they default	Bankers
Forced to bear financial burden of overpriced homes	No	Yes	Who else?

_______________________________

Final score: To be determined in the court of public opinion, and in the corridors of Washington power.

This post was produced as part of the Curbing Wall Street project.

Will Wall Street's Foreclosure Fraud Save Troubled Borrowers?

Zach Carter — Mon, 27 Sep 2010 13:42:48 -0400

I'll have plenty to say about the escalating foreclosure fraud scandal later this week. For now: This is a big, big deal. It isn't a clerical error, it's an aggressive attempt to slap borrowers with thousands of dollars in illegal fees for the luxury of being foreclosed on. And what's more, this absurd, shady business was priced into the entire mortgage securitization scheme from the get-go. Banks have been fudging their documentation for years in order to cut costs and score higher profits from securitization—the business model has relied on this corner-cutting since day one of the housing boom.

The good news is that borrowers can use this epic fraud to defend themselves. If a bank can't prove that it has the right to foreclose on a borrower by showing the proper documentation to a judge, then it doesn't have the right to foreclose. This is a tremendous opportunity for neighborhood advocates. Make them pony up the docs, it might just save your home. The problem isn't restricted to GMAC—foreclosure counselors and attorneys talk about the issue of forged or destroyed documentation all the time, and we already know that JPMorgan Chase and Countrywide (now Bank of America) have major documentation problems. Including GMAC, that's three of the biggest players in every aspect of the mortgage market.

If courts actually follow the law here, we get the best of both worlds—big losses for Wall Street on their predatory loans, and borrowers who get to stay in their homes (mortgage-free, at that). The only question is whether these mortgage losses prove so severe that Wall Street banks come back begging to the government for another bailout. If so, it's an opportunity to do what should have been done in 2008—break up these financial monsters into smaller creatures that don't require bailouts when they fail.

Yves Smith quotes a mortgage banker who assumes that Congress will simply legislate this problem away for Wall Street. Don't count on it. Nobody-- not even the most subservient Wall Street sycophant in the Republican Party—is eager to bailout Wall Street again, particularly to spare megabanks the costs of explicit, documented fraud.

The trick, of course, is making sure that the courts actually follow the law.

Resident Evil: Are Struggling Homeowners As Immoral As the Big Banks?

Richard Eskow — Thu, 01 Apr 2010 02:25:53 -0400

Do homeowners who are underwater on their mortgages deserve to lose their homes? That's what finance commentator Barry Ritholtz says, in a post called "More Foreclosures, Please." Ritholtz must have been channeling his inner Rick Santelli when he wrote that "the boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike," adding that mortgage relief programs for homeowners rewards those who were "reckless, speculative, and foolish" while punishing those who are not.

It's not reasonable to put Barry Ritholtz in the same category as Santelli, of course. Ritholtz is a highly informative, widely quoted writer on economic issues. Santelli's the frat-boy trader turned CNBC host whose rant about "rewarding the losers" got a cheer out of some morons on the Chicago Mercantile Exchange (and started the Tea Party movement). But Ritholtz puts financially beleaguered homeowners in the same "moral hazard" dumping ground as the banks who wrote their mortgages, suggesting that both of them "overused leverage, disregarded risk, (and) ignored history." Is that really fair?

After all, what kind of information was available to the average home buyer during the last decade? How would the average reasonable person have decided whether to buy a home or what kind of mortgage to use - in, say, 2004?

They probably read articles like the one published in February of 2004 in USA Today ("America's newspaper") with the headline "Greenspan says ARMs might be better deal." "Overall, the household sector seems to be in good shape," said Greenspan, who added that adjustable-rate mortgages might be the right choice for many homeowners. Greenspan enthusiastically promoted the new-style mortgages that later played a big role in the meltdown: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," he said.

Greenspan wasn't just Chairman of the Federal Reserve at the time. He was the man the press kept touting as a genius, the one they called "Maestro." Were homeowners guilty of a "moral hazard" for listening to him? Should they face foreclosure because they weren't reading Nouriel Roubini or Paul Krugman or Joseph Stieglitz?

Ignorance of the law is no defense, but ignorance of contrarian economic thought circa 2005 should be. If Greenspan and Geithner and Paulson and all the talking heads on CNBC and the other networks couldn't see the bubble, how could the average home buyer?

The truth is, most people buy homes because they need a place to live -- and because for generations they've been told that buying a home is preferable to renting. Our tax code is structured to encourage home ownership, and the ownership message is reinforced in everything from news reporting to popular culture. (Think Miracle on 34th Street.)

And generalizations about irresponsible, speculative borrowing overlook the fact that the nation's housing problems vary widely by geography. Some areas aren't having a housing bust:

Is a homeowner in Glens Falls, NY any more "reckless, speculative, and foolish" than one a few hours down the road in Poughkeepsie? Poughkeepsie experienced a boom in prices followed by a bust, while high-performing Glens Falls experienced a boom with no bust. West of Glens Falls, my home town of Utica did pretty well too, as this chart illustrates:

It probably helps that Utica experienced its financial collapse a long time ago, so housing prices were already unusually low.

Here's something interesting: The areas with stable housing prices had a much lower percentage of nonprime loans than the country as a whole. As the report's authors mention, the explanation for that probably "runs in both directions--an increase in nonprime lending led to more significant home price appreciation, and more rapid home price appreciation led to a rise in nonprime lending."

In other words, it was a cycle: Risky loans drove housing prices up, and climbing housing prices led to greater availability (and selling) of risky loans. That's not a borrower problem -- it's a pattern of lender behavior. It's a sign of banks driving a speculative frenzy as a "get rich quick" scheme, then leaving the borrowers with the wreckage.

Ritholtz makes some excellent points about the weakness of HAMP (the Home Affordable Modification Program), and its tendency to reward banks for their very real "moral hazard." The biggest problem with the revised HAMP program isn't that it's too generous to troubled homeowners. It's that it's a "pretty please" program that only requires lenders to consider lowering the principal on home loans (or, in the Orwellian language of the program's Fact Sheet, "servicers will be required to consider an alternative Modification approach" - "required to consider" being one of those self-contradicting phrases George Carlin used to rattle off, like "jumbo shrimp.")

But the idea of principal reduction - whether it comes from HAMP or individual lenders like Bank of America - is a reasonable one. Most reductions in principal will still leave homeowners owing more than their house is worth, which should give them their just portion of punishment for any "moral hazard."

"More foreclosures, please" is exactly what we don't want. Ritholtz is understandably concerned about the unfairness of "rewarding" homeowners who got in trouble in a way that keeps prices higher for those who behaved responsibly. But he paints an overly rosy scenario of bad actors being driven from their homes like poltergeists, so that new and vibrant families can move in -- families that can afford the mortgage and have money left over to spend in the local economy. The real solution is going to look less like a ghost story and more like Tim Burton's Beetlejuice, where the ghosts and the living learn to live together happily.

The millions of homeowners who got in over their heads have already suffered a lot. Let's get them some help. And let's keep the focus on the people who caused this problem: The bankers who got rich off these schemes, and the politicians and regulators who let them do it.