Coming Around On The Jobs Crisis

Bob Herbert wonders today if the Obama Administration understands the nature of the jobs crisis. He says that millions of Americans need to get back to work, and if the private sector is unwilling or unable to produce those jobs, then the government must step in. This was the most crucial passage:

The survey for the Economic Policy Institute was conducted in September by Hart Research Associates. Respondents said that they had more faith in President Obama’s ability to handle the economy than Congressional Republicans. The tally was 43 percent to 32 percent. But when asked who had been helped most by government stimulus efforts, substantial majorities said “large banks” and “Wall Street investment companies.”

When asked how “average working people” or “you and your family” had benefited, very small percentages, in a range of 10 percent to 13 percent, said they had fared well.

I think the White House got an advanced copy of Herbert's column, because their message today has a lot to do with jobs. Peter Orszag reiterated that the President is "exploring additional options to promote job creation." Bloomberg covers it as well:

President Barack Obama is considering a mix of spending programs and tax cuts to respond to widening job losses that would amount to an additional economic stimulus without carrying that label.

The discussion of the initiatives, including a boost in transportation spending and an extension of an expiring tax credit for first-time homebuyers, comes as the White House is balancing rising concern about unemployment and a budget deficit the Congressional Budget Office estimates will total $1.6 trillion for 2009, and $1.4 trillion in 2010.

Administration officials have told allies in Congress that a broader transportation bill, and extensions of a homebuyer tax credit and unemployment benefits are all on the table, a Senate aide said.

As well as Herbert's paper, The New York Times:

President Obama’s economic team discussed a wide range of ideas at a meeting on Monday, following his Saturday radio address in which he said it would “explore additional options to promote job creation.” But officials emphasized that a decision was still far off and that in any event the effort would not add up to a second economic stimulus package, only an extension of the first [...]

Among the options for additional steps is some variation on Mr. Obama’s proposal during the stimulus debate to give employers a $3,000 tax credit for each new hire, which Congress rejected last winter partly out of concern that businesses would manipulate their payrolls to claim the credit. Another option would allow more businesses to deduct their net operating losses going back five years instead of the usual two; Congress limited the break to small businesses as part of the economic stimulus law.

Not to mention the WSJ and a separate Times article.

Calculated Risk worked through some of the safety net options the other day. Extending unemployment benefits and COBRA reductions sounds fine, but I don't see exactly how they create jobs - though added consumer spending may save some. The homebuyer tax credit, while popular, is a complete waste of money, costing tens of thousands per new home sold, and it isn't boosting housing and construction to any great degree.

As for the rest, infrastructure spending through the transportation bill would be great, but is the Administration willing to waive paygo rules, or do they have some idea to pay for it? The business tax credit for new hires seems ripe for abuse, as does the "carry-back" provision allowing major tax breaks for corporations. That just sounds like trickle-down economics to me, and thus far it hasn't worked.

Robert Reich has some much better ideas, though he does side with the new jobs tax credit.

Use existing authority under both the stimulus package enacted earlier this year and the nefarious TARP bailout fund -- extending and combining them into a fund to make up for state and local cuts in public school budgets, childrens' health, public health (we need workers to administer swine flu vaccine) and public transportation. Instead of bailing out banks and giant automakers, we should switch to bailing out public services that average people need.

Propose a one-year payroll tax holiday on the first 20,000 of income. Republicans as well as Blue Dog Dems could go along with this, and it would be a highly progressive tax cut since 80 percent of Americans pay more in payroll taxes than they do in income taxes.

Give small businesses a "new jobs tax credit" for every net new job created over the next year. Granted, under normal circumstances this sort of jobs credit doesn't have much effect, and it's difficult to separate hires that would have happened anyway from net new ones. But we're not in normal circumstances; small businesses, which are responsible for most new jobs, still aren't hiring. They need a boost.

Dramatically expand the Small Business Administration's lending programs and have the Fed buy up the SBA's debt. Big banks are not lending to small businesses. TARP has been an utter failure in this regard. The SBA and the Fed should circumvent them and help small businesses get the capital they need, so they can start hiring again.

These might work in separate bills instead of one big stimulus bill that would have a target on its back. There's no question that state aid should be on the top of the list, and I think accelerating infrastructure spending is vital enough that deficit spending makes sense; government interest rates remain low, after all.

More than anything, the Obama Administration has to show through their actions a concern for those struggling right now. The jobs picture is intimately tied to their economic fortunes, so they have every incentive to do so.

Legislature Home Stretch Update

There's lots of significant news in the Legislature's last week regarding various bills, and it's extremely difficult to keep up with it all, probably by design. I should point out that, while the legislative calendar has an end date, there's no actual reason for some of the forced bottlenecks that result in hundreds of bills being passed at the last minute. It creates a shroud of secrecy in which special interests rule, and saps the public trust. A Democratic leadership actually interested in positioning government as somewhat decent would remove these forced bottlenecks from the internal legislative rules and allow bills to be approved on a rolling basis. That said, this is the system we have now, and here's a bunch of news about various bills:

• A new bill would exempt non-General Fund workers from furloughs. This would reverse one of the dumbest provisions in the budget bill, the practice of forcing furloughs on workers not paid by state government, saving almost no money and depriving people of needed services. Of course, the Governor will probably veto this one, because he hates admitting how wrong he is.

• Democrats on that vaunted water committee have decided against floating a bond to pay for any restoration or overhaul of the Delta. This means Republicans won't vote for it, and very little will come of this very important committee thrown together at the last minute. Some conference committee reports are here, but a deal looks remote, as it would need votes from some of the empty chairs in the Yacht Party.

• One bill that has cleared both chambers would set up "Education Finance Districts", "in which three or more contiguous school districts can band together to try to increase local taxes." This is a small step to make it easier for districts to pass parcel taxes to fund schools, but at this point every little bit helps. The 2/3 rule for approving such taxes would remain.

• With all the talk of health care reform, it's notable that an anti-rescission bill has once again passed the legislature. The bill would also simplify insurance forms. Last session, Arnold Schwarzenegger vetoed it. There's something you don't hear much about from the Democratic leadership - Arnold Schwarzenegger vetoed a bill that would have banned insurance companies from dropping patients after they get sick. He sided with the forces of insurer-assisted suicide. This is your modern Yacht Party on this issue:

"Any of those who have read the various exposés in the Los Angeles Times and others . . . is aware that health insurers have admitted and acknowledged they engaged in a form of post-claims underwriting," said Sen. Mark Wyland (R-Escondido). "It is unethical and, considering what some of these people have endured, it really borders on the immoral."

However, Wyland said he would not vote for the bill because the Department of Insurance has proposed new rules to solve the problem, and he wants to see how they work.

Hey, give 'em a chance to see if the immorality stops! If not, we can think it over.

• The Legislature may extend a homebuyer's tax credit passed in a previous budget agreement that was nothing but a bailout for developers. It only credited new construction, and was structured only to benefit high-income households who could afford new construction. By the way, sales of new units have fell since this was enacted, so it's not even meeting its intended purpose. But it's a giveaway to a special interest, so off the money may go, even though we cannot afford it at this time.

• A bill to ban bisphenol A (BPA) from children's products was delayed after the Assembly couldn't muster 41 votes. The debate in the Assembly last night was pretty fierce.

• Cities and counties reacted angrily to a proposed bill to slow local government bankruptcies until vetted by the California Debt and Investment Advisory Commission. On the merits this looks to be a bill that would install more control on locals from Sacramento, although there are arguments on both sides. But mainly it's about the fate of union contracts in local bankruptcies, I don't think either side would deny that.

• A roundup of other bills passed yesterday can be found here.

Cramdown Returns

The Federal Reserve revealed survey results today showing the economy stabilizing throughout the country and the recession nearing an end. But without jobs, people won't feel that recession's end. As a result, even the Fed survey showed consumer spending "soft," and employment "weak" in all 12 Fed regions. And that will impact the still-unresolved sector of the economy that could easily relapse us into a double-dip recession, the housing market.

Although the ailing residential real-estate market is still weak, it also flashed signs of improvements. The Fed regions of Chicago, Richmond, Boston and San Francisco observed an "uptick in sales." Most regions said buyer demand remained stronger at the low end of the housing market, although Philadelphia did note an "upturn in sales at the high end of the market."

The Boston, Cleveland, Dallas, Kansas City, Richmond and New York regions credited the first-time home buyer tax incentive with spurring sales. Most regions reported downward pressure on home prices, although Dallas and New York said that prices were "firming."

That first-time homebuyers credit will soon expire, and this analysis fails to take into account the problems from those facing foreclosure, particularly those who got into adjustable-rate mortgages. The interest-only loan holders, in particular, could see a real disaster in the months and years to come when their rates reset.

Edward and Maria Moller are worried about losing their house — not now, but in 2013.

That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years [...]

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

These people are going to lose their homes, with devastating consequences for the rest of the real estate market and the greater economy ($908 billion dollars are tied up in active interest-only loans). Even the Treasury Department expects millions more foreclosures in the same report that they tout their homeowner protection programs.

This is why it's good to see cramdown return. The provision, allowing bankruptcy judges to modify primary home loans unilaterally the way he would a vacation home or a yacht, would give those facing foreclosure a level playing field against lenders who have no incentive to change the terms of their loans.

House Financial Services Committee Chairman Barney Frank (D-Mass.) tells the Huffington Post he plans to revive the effort to give bankruptcy judges the authority to renegotiate home mortgages -- by making it part of this fall's much-anticipated financial regulatory reform bill.

Wall Street banks scored an overwhelming victory in April when they soundly defeated a cramdown measure in the Senate. Only 45 Democrats voted with homeowners, dealing the measure the kind of defeat that often sends legislation off into the wilderness for years, if not for good.

Frank and Senate Majority Whip Dick Durbin (D-Ill.), who led the bill in the upper chamber, both said after its defeat that it was finished. Frank was dismissive when, about a week after the vote, HuffPost asked if cramdown might come back. "Excuse me, what planet were you on last week? The vote was 45 to 51. Why would you ask that? Do I think there's a likelihood we could overturn 45-51? No," said Frank. "I wish it weren't the case."

But since then, foreclosures have continued unabated and the unemployment rate has continued to climb, increasing to 9.7 percent last month. Both forces feed on each other and create a drag on the economy.

The Obama administration had high hopes for the law Congress passed intended to encourage mortgage modifications. The law is all carrot, however, and no stick. Cramdown is the stick. If banks think they could get hit in bankruptcy court, they're more likely to bargain.

Because regulatory reform is a big bill with enough populist-friendly elements in it to be difficult to oppose, it could be a good vehicle for cramdown. Add that to the Consumer Financial Protection Agency and more credit card reform legislation, and that bill will be the subject of a huge fight, perhaps even bigger than the health care bill, at least in terms of lobbyist energy.

Meanwhile In The Real Economy

We could deliver health care and add a second stimulus and do a host of other things to improve the economy, but if numbers like this continue to be the norm, we're not going to get very far in fixing things.

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
...
The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the second quarter was 4.30 percent, an increase of 45 basis points from the first quarter of 2009 and 155 basis points from one year ago. The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

What's more, a separate report says that foreclosures will peak at the end of 2010. That's when a certain set of midterm elections will be held.

Foreclosures hurt the economy really badly. But banks and lenders have made the calculation that it costs them less to foreclose than it does to modify terms of loans. Because if they reduce principal on the loans, their solvency would once again come into question. I know that the government's smiling because they didn't have to dip into an expected $250 billion earmarked in the budget to cover bank losses further, but that's only because reality has been papered over. The Federal Reserve and the FDIC and other government entities have basically covered the banks. But mass loan mods would expose them.

Which is why it isn't happening. And as a result, people suffer. And so does the real economy. As long as foreclosures continue, which leads eventually to higher unemployment and more foreclosures ina kind of death spiral, the American consumer will simply not have the wherewithal to spend at the rates necessary for recovery.

When you look at Obama's poll numbers, think in the context of the economy. It's always been the greatest predictor of national political performance. He inherited a mess, but if he cannot work it out over four years or give people a credible reason to believe he's acting in their interests, he'll be gone.

48% Underwater

This must have happened while I went on vacation:

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Ho. Lee. Crap.

Being underwater not only affects being able to keep the home, but it profoundly affects individual mobility. You become chained to your home, waiting for it to increase in value, even if there are no jobs in your area or you get an attractive offer elsewhere. That's just one element of how foreclosures and underwater homes impact the economy.

How in the world can we fix this? So far the foreclosure mitigation options offered by the White House have been inadequate. Though sales are creeping back, if a second foreclosure wave strikes the market could remain unsettled for some time. The Obama Administration is moving toward encouraging affordable rental units, which I think is a good sign.

The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an “ownership society’’ and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities.

The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.

Analysts say the approach takes a wrecking ball to Bush’s heavy emphasis on encouraging homeownership as a way to create national wealth and provide upward mobility for low- and working-class families, especially minorities. Housing and Urban Development Secretary Shaun Donovan’s recalibration of federal housing policy, they said, shows that the Obama White House has acknowledged that not everyone can or should own a home.

That deals with a future problem of ensuring that the only people with mortgages are the ones who can pay for them, however. It does little for those underwater in their home or facing foreclosure right now. For that group, I think we need to seriously look at right to rent, converting homes that would otherwise be foreclosed into rental properties for the families for a set period of time. This would solidify neighborhoods, give banks a revenue stream instead of having a foreclosed home sit on the market (although they're probably making more from foreclosure in the short term, as it stands right now), and help people stay connected to their communities. Dean Baker writes:

It's time to try a new route for helping homeowners. There is a simple alternative: Congress can pass legislation that gives homeowners facing foreclosure the right to stay in their home as renters. This "right to rent" policy would require no taxpayer money, no new bureaucracy and could immediately benefit homeowners facing foreclosure.

The basic idea is simple. In recognition of the extraordinary crisis, Congress would give families that took out mortgages at the peak of the boom and are facing foreclosure the option to remain in their homes as renters for a substantial period of time -- five to 10 years -- while paying the market-rate rent. Earlier this year, Freddie Mac launched a similar policy, giving former homeowners the option to lease their recently foreclosed properties, but on a month-to-month basis. That was a positive step, but it does not give families the housing security they need....

Although they would lose ownership of their homes under "right to rent," the residents would be able to stay in their homes, neighborhoods and schools. This would provide families facing foreclosure with needed stability and housing security.

This would also help with loan modification, as banks would have a choice to change terms or accept rent. Much like cram-down, it would put the playing field level again, instead of hopelessly tilted in favor of the banks.

We need to do something with the first principle that reducing foreclosures is the goal, not satisfying the banks. Cram-down probably makes more sense, but I appreciate the thought behind right-to-rent.

...slightly related, this WSJ editorial criticizing Vermont for having too many well-informed consumers and industry regulations, leading to "pitfalls" like fewer foreclosures and healthier banks, is worth reading if you want a hoot. If only we in California had the pitfalls of Vermont!

Primarying The Federal Reserve

Much in the way that lawmakers can get pulled from the center to the left when primaried by a member of their own party, the Federal Reserve, facing the prospect of a Consumer Financial Protection Agency that would take away some of its power, is shifting to a more consumer-friendly position on lending practices, including getting rid of the dreaded yield spread premiums that incentivize lenders to screw their customers.

The Federal Reserve on Thursday unveiled a proposal to curb abusive lending practices by reining in compensation for mortgage brokers and by helping borrowers better understand the terms of loans available to them.

The plan, which builds on a similar effort adopted by the Fed last year, comes just as the central bank is trying to fend off a legislative initiative that would strip its consumer-protection role by creating an agency to oversee consumer financial products.

"It certainly doesn't hurt the Fed that they came out with mortgage lending rules that were tougher than most of the industry was expecting," said Jaret Seiberg, a policy analyst at Washington Research Group, a unit of Concept Capital.

The toughest part of the Fed's plan deals with compensation for mortgage brokers, who act as middlemen between borrowers and lenders. These brokers can be rewarded with extra fees for placing borrowers in higher-rate loans.

The proposal attempts to end this practice by barring lenders from offering extra compensation based on the terms of the loan, including the rate. Consumer advocates have long argued that incentive-based pay contributed to the subprime mortgage meltdown.

"This plan has got the potential to eliminate one of the worst practices in the mortgage market," said Michael Calhoun, president of the Center for Responsible Lending. "The devil will be in the details. Some of the worst actors in the industry have proven to be adept at exploiting weaknesses in rules. The final rule has to be tightly and carefully written."

However these things get into law is fine with me. Whether the threat of the CFPA entices the Federal Reserve to do its job, or whether a CFPA gets enacted and does it itself, ending the practice of paying off mortgage brokers for screwing their customers is a good thing.

Of course, these are forward-looking proposals. And however solid they may be, they do not deal with the current problem of people struggling to stay in their homes and stave off foreclosures, which is only growing. The current mortgage relief efforts are simply not working. I'm glad that Sheldon Whitehouse is signaling another look at cram-down, the idea of allowing bankruptcy judges to modify loan terms with the broker. You have to give the borrower some opportunity to dictate terms, or as we have seen the bank will not modify the loans.

But there is another option, and that's own to rent. Dean Baker has pushed this proposal prominently, and it's starting to get support on Capitol Hill.

There is a simple solution that requires no taxpayer dollars, requires no new bureaucracy and can immediately help millions of people facing foreclosure. Congress can simply temporarily alter the rules on foreclosure to allow homeowners facing foreclosures the right to stay in their home for a substantial period of time (e.g. seven to 10 years) as renters paying the market rent.

The lender would take ownership of the house and would be free to resell it, but the lease would carry over for the duration of the period designated by Congress, or until the former homeowner decided to move. In this period, normal landlord-tenant laws would apply, with the exception that the lender would not have the option to evict the former homeowner without due cause.

This rule change would provide homeowners with a large degree of housing security. If they like their current home, their neighborhood, their kids' schools, they would have the option to remain there for a substantial period of time. Furthermore, by making foreclosure a less attractive option for lenders, a right to rent law should give lenders much more incentive to pursue mortgage modifications as an alternative to foreclosure.

This change should also be beneficial for neighborhoods that are plagued by large numbers of foreclosures. Keeping former homeowners in their homes will keep homes occupied, preventing the blight that often comes from vacant homes that are not maintained.

The banks will fight this, but the overall housing market will likely rise from diminishing the glut of supply. The banks would get off the hook for a lot of the upkeep of blighted properties, the cycle of foreclosures could get stopped, and they would obtain consistent revenue streams in the form of rental payments, while still holding the potential equity of selling the home. I really, really like this idea.

...of course, the Fed's nods toward consumer protection won't be enough for people like William Greider, who think it ought to be dismantled. I think it's hard to argue with Greider, considering he knows as much about the Fed as any human being alive.

Loansharks In Second Life

I don't think I'm being hyperbolic by saying that the average subprime mortgage broker should probably be in prison by now. They took loans that their customers had no possibility of paying back, often by forcing them into exotic arrangements where their payments would shoot up by double after a reset. They got bonuses for putting people into a higher interest rate than what the borrowers could qualify for. Now lots of those loans have gone sour, but the broker's company has already passed on that risk in the form of mortgage-backed securities. Indeed, these same lenders who preyed upon homeowners by getting them into residences they couldn't afford are now ripping them off again by setting up loan modification companies.

Yet the dangers assailing Mr. Soussana’s clients have yielded fresh business for him: Late last year, he and his team — ensconced in the same office where they used to broker mortgages — began working for a loan modification company. For fees reaching $3,495, with most of the money collected upfront, they promised to negotiate with lenders to lower payments on the now-delinquent mortgages they and their counterparts had sprinkled liberally across Southern California.

“We just changed the script and changed the product we were selling,” said Mr. Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center. The new script: You got a raw deal, and “Now, we’re able to help you out because we understand your lender.” [...]

FedMod is but one example of how many of the same people who dispensed risky mortgages during the real estate bubble have reconstituted themselves into a new industry focused on selling loan modifications.

Despite making promises of relief to homeowners desperate to keep their homes, FedMod and other profit making loan modification firms often fail to deliver, according to a New York Times investigation based on interviews with scores of former employees and customers, more than 650 complaints filed with the Better Business Bureau, and documents filed by the Federal Trade Commission in a lawsuit against the company.

The suit, filed in California federal court, asserts that FedMod frequently exaggerated its rates of success, advised clients to stop making their mortgage payments, did little or nothing to modify loans and failed to promptly refund fees. The suit seeks an end to FedMod’s practices, and compensation for customers.

“Our job was to get the money in and then we’re done,” said Paul Pejman, a former sales agent who worked out of FedMod’s two-story headquarters in Irvine, Calif. He recounted his experience, he said, because “I really feel bad.”

Before state regulators and the Feds figured out this was going on, hundreds of loan modification companies took probably billions from distressed homeowners and provided virtually nothing in return. They saw opportunity in crisis - and they also CREATED much of the crisis by selling the homes to people who couldn't afford them in the first place.

Special place in hell reserved for them...

Own To Rent

I really hope this goes through:

NEW YORK, July 14 (Reuters) - U.S. government officials are weighing a plan that would let borrowers who have fallen behind on their mortgage payments avoid eviction by renting their homes instead, sources familiar with the administration's thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Dean Baker has been hawking own to rent policy since at least last year as a way to keep people in their homes.

This bill would immediately give families security in their home, so that if they like the home, the neighborhood, the school for their kids, they would have the option to stay in the house for a substantial period of time. This also has the great benefit for the neighborhood in that homes will remain occupied.

Perhaps more importantly, this change in foreclosure rules will give banks a real incentive to negotiate conditions under which homeowners can stay in their homes as owners. Banks do not want to become landlords. The bank will own the house after a foreclosure, but a house with a renter is worth much less to them than a house over which it has complete control.

Giving the homeowner the right to stay as a renter hugely increases their bargaining power with the bank. The result of this change in foreclosure rules is that far more homeowners are likely to remain in their homes as owners.

Seeking Alpha criticizes the proposal because of the implementation, when as Baker explains the goal is to give those facing foreclosure a stick to put themselves on a level playing field with renters. The worst option in the housing process is a situation where people are thrown out of their homes and the property lies vacant. The banks can't deal well with that, the homeowners are out on the street, and the economy takes an average hit of $250,000. Banks don't manage the property when it's vacant, that's arguably worse than them having to manage a rental property. Laws governing the rental arrangements can be drafted and made to a uniform standard.

Some have said that this would freeze the housing market and that's an issue, but that would happen with a moratorium as well. Those so focused on "clearing the market" don't want to deal with millions of Americans on the street. Easing these homeowners facing foreclosure into a rental situation that is sustainable makes a great deal of sense, and maybe we can clear out those homes over a number of years.

No End To The Foreclosure Mess

The New York Times editorial board ends the silence from the traditional media on the persistent and ongoing crisis in foreclosures.

A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it [...]

One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness [...]

There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

It's kind of a chicken-or-the-egg phenomenon. Do we need more foreclosures to reach a bottom in prices, or is the drop in prices driving the rate of foreclosures? I think it's the latter, but regardless, as a result more people lose their houses, and the loss in home values plays havoc with personal wealth, turns decent borrowers into underwater borrowers, and through tax reassessments saps state and local governments of revenue. So regardless of your thoughts about "interference in the market," we need to stop the crisis of rising foreclosures, and there are innovative ways to do that - a new HOLC, an "own-to-rent" scenario.

Right now, nothing meaningful is being done. The plans concocted by Washington are simply not working.

She had seen the advertisements for the new government program offering relief. She had heard President Obama promise that help was on the way for homeowners like her, people who had lost jobs and could no longer make their mortgage payments.

But when Eileen Ulery called her mortgage company — Countrywide, now part of Bank of America — the bank did not offer to alter her mortgage. Rather, the bank tried to sell her a new loan with a slightly lower monthly payment while asking her to pay $13,000 toward the principal and a fresh $5,000 in fees.

Her problem was that she did not yet present a big enough problem to merit aid [...]

More than three months after the Obama administration outlined a new program aimed at rescuing millions of distressed homeowners by compensating banks that modify mortgages, Ms. Ulery’s experience illustrates the mixture of confusion, frustration and limited assistance that now reigns.

Through many months of wrangling over the fate of the financial system, with hundreds of billions of taxpayer dollars dispensed on bailouts, distressed homeowners have waited for their own rescue amid talk that it was finally on the way. Modifications of so-called subprime and Alt-A mortgages — those made to people with tarnished credit — actually fell by 11 percent in May from April, according to research by Alan M. White at Valparaiso University School of Law.

Locally, the forced modification program from Countrywide in California, thanks to a lawsuit settlement, has done more than the federal government. But California foreclosures are rising too, because the crisis has spread. Rates are recasting, particularly on Alt-A loans and option-ARM (adjustable rate mortgage) loans. More homes have slipped into negative equity over the past six months. It's terrifying.

And the housing market has already brought the economy to the brink of collapse once. How will the policymakers stop the second wave?

Alt-A Meltdown

If you aren't depressed enough by the coming collapse of social programs for Californians as the budget nightmare drags on, consider that there will soon be more need for social services and less revenue available, as we segue into the rarely-remarked upon second wave of foreclosures in the Alt-A market.

A new wave of foreclosures is building in Sonoma County, one that echoes the subprime crisis that flooded the region’s housing market with distressed properties.

The tide of troubled loans, which first struck high-risk borrowers who did not qualify for conventional mortgages, is now spreading to people with good credit who purchased more expensive homes.

This time, it involves borrowers who took out mortgages known as Alt-A loans. Like the subprime loans that began imploding in 2006, these loans offered seductively low introductory payments that enabled many borrowers to buy or refinance homes that were pricier than they could otherwise afford.

Now, those borrowers increasingly are discovering the true cost of their loans. When the introductory period ends, monthly payments can jump 50 percent or more on the typical Alt-A loan, far higher than many borrowers can afford.

There are hundreds of thousands of these loans in California just waiting to recast. In the context of Sonoma County, 18% of all housing loans are Alt-A, most of them purchased between 2004 and 2006. Two-thirds of them will see rapid jumps in their payments in the next two years.

I spoke with Asm. Ted Lieu this weekend, who didn't even want to describe these as foreclosure waves. "It feels like they never stop." He hopes that the latest government program to try and fix the foreclosure crisis, which can allow new mortgages to be issued at 96.5% of current value, will actually make an impact, but we're talking about a whole new class of borrowers getting into trouble because of these rate recasts. This of course adds to the properties on the market, bringing down prices, adding to a whole new wave of tax reassessments, and on, and on, and on.

You can almost set aside the unemployment crisis, and the feedback loop of decreased government spending leading to reduced consumer spending and more unemployment. Just this continuing housing crisis is enough to permanently disable any solutions to economic recovery.

Drip Drip Drip You're Underwater

The reckoning of the next wave of the foreclosure crisis has started to reach critical mass. Bloomberg reports on the record first-quarter numbers.

Mortgage delinquencies and foreclosures rose to records in the first quarter and home-loan rates jumped to the highest since March this week as the government’s effort to fix the housing slump lost momentum.

The U.S. delinquency rate jumped to a seasonally adjusted 9.12 percent from 7.88 percent, the biggest-ever increase, and the share of loans entering foreclosure rose to 1.37 percent, the Mortgage Bankers Association said today. Both figures are the highest in records going back to 1972. Fixed rates rose to 4.91 percent, Freddie Mac said, and an increase in bond yields earlier this week shows rates may continue rising.

AP adds that 12% of all homeowners are either behind in their bills or in foreclosure. 1 in 8, with most of the foreclosures coming from the bubble states of California, Nevada, Florida and Arizona. And top economists see this trend continuing through the end of next year.

David Sokol, chairman of Berkshire Hathaway Inc's (BRKa.N) MidAmerican Energy Holdings and a contender to succeed Warren Buffett, warned that the U.S. housing market still has a ways to go before bottoming out [...]

"As we look at the economy, I have to be honest: we're not seeing the green shoots," Sokol said at the annual Ira Sohn Investment Research conference, which drew some 1,200 hedge fund executives to hear top investors share trade ideas.

"That's not surprising to us. It took us 11 years to get into this mess where it is. We went into the emergency room last fall and by January the banking system and economy generally were in intensive care, and we'd expect it to stay there for some time," Sokol said.

If anything, the glut of housing supply could grow larger as a new wave of foreclosures and pending sales breaks on the market.

"We think the official statistics of 10 to 12 months' backlog is actually nearly twice that amount," he told the gathering, which raises funds for the treatment and cure of pediatric cancer.

Other economists agree.

The banks may feel safe and warm right now, but another foreclosure wave will increase the toxicity of their assets exponentially. Unemployment-driven foreclosures and more rate recasts will feed on themselves.

I just don't see a great policy response to this. Maybe that housing bill will help. It'd help a lot more with cramdown.

The OTHER Big News Today

It's been an eventful day, but one blip that isn't making it to the top of the radar screen concerns the still-plummeting housing market. The Case-Schiller Index shows prices falling rapidly in March, and the market tracking the more adverse scenario seen in the Treasury's stress tests.

Prices keep falling for one major reason - foreclosures remain extremely high, and homebuyers are picking up those foreclosed homes first at fire-sale prices. We're seeing a new wave of foreclosures due to job loss and the economy, and even prime loans are no longer safe.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers’ introductory interest rates expired and were reset higher.

“We’re right in the middle of this third wave, and it’s intensifying,” said Mark Zandi, chief economist at Moody’s Economy.com. “That loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults. They’re coast to coast.”

It's the big problem that was not solved by the relatively puny housing bill, stripped of the cram-down option. Since practically all of these loans were sold and tied up in mortgage-backed securities, in addition to just losing the value of the mortgage, new assets become toxic with each passing day. Considering that the last guy at Treasury, Hank Paulson, whose investment firm Goldman Sachs profited mightily from the MBS market, didn't even understand it, I hold out little hope for his successor to get a handle on it.

We're supposed to be dazzled by "green shoots" and see the economy returning to normal. Sorry, I still see a dying housing market, and that still threatens to bring down the whole system. Thanks to relatively strong policy responses, the event of a depression has probably been averted in most of the world. But we're going to be treading water for quite a while.

This New York Review of Books symposium, on a related theme, is a good read.

Fighting Foreclosures By Any Means Necessary

Regardless of whether we all see green shoots or yellow weeds, whether we've hit bottom or keep hurtling downward, reality suggests that we're many years from normal.

The economy could begin to pull out of the recession later this year but a full recovery could take as long as six years, according to a forecast issued today by the Federal Reserve.

The projections were grimmer than those issued by the Fed in January. Yet, they still reflected a growing sentiment inside and outside the central bank that the economy has turned a corner and is declining at a more moderate pace than in the fall.

Fed leaders predicted the economy would shrink this year and then expand at an annualized rate of between 2 and 3 percent in 2010, before gaining further momentum in 2011. However, Fed leaders anticipated labor market conditions will be weak for some time. They projected unemployment to rise to between 9.2 and 9.6 percent and stay in that range through the end of next year before leveling off at between 7.7 and 8.5 percent in 2011. As of April, the unemployment rate was 8.9 percent.

I trust that assessment, and if anything it's too optimistic. We're seeing other developed economies basically in depression right now, and liabilities that were an outgrowth of the market crash, like our record pension insurance deficit, will really start to affect pensioners and those who will have less money to spend for years to come. The market remains 40% below its peak.

Our biggest problem right now remains the foreclosure crisis. The economy cannot sustain continued foreclosures at this rate. It impacts construction, because new inventory need not be created. It impacts the lenders' bottom lines, which affects lending throughout the economy. And small business who cannot get credit cannot create jobs. Then there's the ripple effect of foreclosures to property values, which affects the bottom lines of local governments, resulting in decreased services, particularly for education, and fewer jobs. Rising foreclosures hit just about every aspect of the economy. And the bill the President signed this week won't do much to help.

After months of debate, the final version of the latest bill eliminated a key provision that would have allowed bankruptcy judges to modify mortgage terms. Faced with heavy pressure from the banking industry, Congress again tabled the highly contentious provision after several attempts to introduce it over the past year. That leaves the decision to refinance a mortgage up to lenders and investors holding securities backed by those loans.

Meanwhile, homeowners stuck with unaffordable payments, or who now owe more than their house is worth, must slog through the red tape of negotiating a new loan with their lender.

I've come to the point where this guy's activism is starting to look pretty good to me.

Bruce Marks doesn't bother being diplomatic. A campaigner on behalf of homeowners facing foreclosure, he was on the phone one day in March to a loan executive at Bank of America Corp.

"I'm tired of borrowers being screwed!" Mr. Marks yelled into the phone. "You're incompetent!" Before hanging up, he threatened to call bank CEO Kenneth Lewis at home to complain about the loan executive.

Mr. Marks's nonprofit organization, Neighborhood Assistance Corp. of America, has emerged as one of the loudest scourges of the banking industry in the post-bubble economy. It salts its Web site with photos of executives it accuses of standing in the way of helping homeowners -- emblazoning "Predator" across their photos, picturing their homes and sometimes including home phone numbers. In February, NACA, as it's called, protested at the home of a mortgage investor by scattering furniture on his lawn, to give him a taste of what it feels like to be evicted.

In the 1990s, Mr. Marks leaked details of a banker's divorce to the press and organized a protest at the school of another banker's child. He says he would use such tactics again. "We have to terrorize these bankers," Mr. Marks says.

Something needs to shake up the status quo. Because the results for the overwhelming majority of people, even those with seemingly no connection to homeownership or foreclosures, will be catastrophic.

Not So Green Shoots

I acknowledge that there are signs that the economy is on an upswing. But the optimistic scenarios don't jibe with all the data. First of all, the deficit keeps rising due to continued unemployment. That's to be expected, but it will still make it harder for any second stimulus to occur, meaning that we're pretty much stuck with the policies currently in place. The lower tax revenues has led to the first April deficit in 26 years, as typically April is a big enough revenue month that money coming in outweighs money going out. And the deficits are affecting the US credit rating, the ability to obtain cheap money.

Now, I don't want to dwell on the budget deficit, especially because in the near term it can't matter as much as getting people back to work. But it constrains the politically possible in Washington, and it will prevent the Administration from delivering additional help to the economy, which clearly it desperately needs:

Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.

"April was a shocker," said Rick Sharga, a spokesman for RealtyTrac. "I would have bet on a dip because March foreclosures were so high.

Instead, filings inched up 1% from March and rose 32% compared with April 2008.

Thanks, opponents to cramdown!

Now, interestingly enough some banks have been so chilled by threats of prosecution in the states that they have started to settle out of court in predatory lending cases, with much of that money going toward reducing principal for homeowners. If that practice becomes more widespread, perhaps we can stop this second wave of foreclosures.

One hears a lot about loan modifications these days. So far there are two basic approaches.

I) The borrower is given relief in the form of a lower interest rates and stretched-out maturities. The homeowner stays in the home.

II) The bank will accept a deed in lieu of the mortgage. The homeowner is out of the home.

There have been very few cases where a homeowner is allowed to stay in the home and achieve a principal reduction. The Boston settlement opens the floodgate for principal reduction. It is the essence of the agreement. All 714 borrowers are now eligible for principal reduction and the money is just sitting there waiting to be collected.

One can imagine the conversations between neighbors in Boston:

A: “Good news finally! I just got 35% net off my first and second mortgage.”

B: “Wow! How did you manage that?”

A: “I was lucky enough to get my mortgages through Goldman Sachs. They did a deal with the Mass AG and I win the lotto!

B: “I have my mortgages with Indy Mac Bank can I get reduction too?

A: Sure. Here is the number to call. Now lets party!

I really want the Administration to succeed, but I hope they aren't being swayed by all this happy talk. We're still in a dangerous place.

Not Over In California

I think the general consensus on the economy from the grand poohbahs of the establishment is that we're contracting less slowly, that we're easing toward the bottom and will be able to improve as the year goes on. This optimism depends on no further "unforeseen" downturns in key economic sectors. But that just doesn't seem plausible. Zillow.com's estimates show that over 20% of all homeowners owe more on their mortgages than their homes are worth, as prices continue to decline. Considering that 24,000 homes and apartments are vacant in Sacramento, for example, up 40% year over year, the glut of supply suggests that those prices have further to fall. And thus we will not see much of a rebound in equity in the short term. Keep in mind that many of these homeowners who are underwater will experience recasts to their mortgage rates in the coming year, further straining their ability to make payments.

Now we have compelling evidence that a second foreclousre wave is starting to rumble through California once again, which could trigger the very same spiral that brought the nation's economy to its knees last year.

Here’s another sign that California’s foreclosures could jump in 2009: Delinquencies on dues owed to homeowner associations have risen sharply.

The homeowner association delinquency rate can serve as a leading indicator of sorts because homeowners usually stop paying dues before they stop paying their mortgage. The 90-day delinquency rate on dues for the 260 homeowner associations in California managed by Merit Property Management jumped to 5.3% in March from 2.8% last June. Delinquencies first spiked to 2.6% in December 2007 from 0.8% in March 2007.

The Journal looked at how banks were beginning to ramp up foreclosures after holding off for several months. Pre-foreclosure notices in California spiked in March after a state law had suppressed foreclosures at the beginning of the year.

Pre-foreclosure notices are where this begins, and those notices rose by 80% in the first quarter of 2009 from the previous quarter. As the article notes, the moratorium on foreclosures has been lifted, which will put more pressure on homeowners. We all understand that bad loans caused this crisis in the first place, right? Well, a lot of bad loans are still out there. At particular risk are those mortgages purchased at the height of the bubble in 2005 and 2006. Loans made in 2006 have an 8.5% default rate statewide. These are the worst liar loans, NINJA loans, many of them due to recast to higher interest rates. And this includes jumbo loans.

The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.

If you think this is over, particularly in California, duck.

Beware The Second Wave

You know, I keep hearing about green shoots, and how the banks feel comfortable lending to one another again, and how the crisis has been averted. And then I read something like this, and despair:

Home values in the United States extended their fall in the first quarter, with more than one in five homeowners now owing more on their mortgages than their homes are worth, real estate website Zillow.com said on Wednesday.

U.S. home values posted a year-over-year decline of 14.2 percent to a Zillow Home Value Index of $182,378, resulting in a total 21.8 percent drop since the market peaked in 2006, according to Zillow's first-quarter Real Estate Market Reports, which encompass 161 metropolitan areas and cover the value changes in all homes, not just homes that have recently sold.

U.S. homes lost $704 billion in value during the first quarter and have depreciated $3.8 trillion in the past 12 months, according to analysis of the reports.

Declining home values left 21.9 percent of all American homeowners with negative equity by the end of the first quarter, Zillow said.

Banks are finally starting to tighten their mortgage standards, which looks good going forward. But we're talking about millions of homeowners underwater, many of whom could easily decide that constantly playing catch-up is no longer worth it. Keep in mind that many of these homeowners will experience recasts to their mortgage rates in the coming year, further straining their ability to make payments.

I just don't see how anyone can claim that the crisis has been lifted when this many people face foreclosure in the next year. The first wave brought the economy to its knees, and the second could be even bigger.

...we all understand that bad loans caused this crisis in the first place, right? Well, a lot of bad loans are still out there.

...Man, this looks like a big problem.

The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.

Too Big, Period.

What will post-recession Wall Street look like? The President talks about a smaller financial sector as a function of a stronger economy.

And so I wonder if you would be willing to describe a little bit of your learning curve about finance, and what you envision finance being in tomorrow’s economy: Does it need to be smaller? Will it inevitably be smaller?

THE PRESIDENT: Well, first of all, I think that we should distinguish between finance as the lifeblood of our economy and finance as a significant industry where we have a comparative advantage — right? So in terms of just growing our economy, we’ve got to have enough credit out there to fund businesses, large and small, to allow consumers the flexibility to make long-term purchases like cars or homes. So that’s not going to change. And I would be concerned if our credit market shrunk in ways that did not allow for the financing of long-term growth.

What that means is not only do we have to have a healthy banking sector, but we’re going to have to figure out what we do with the nonbanking sector that was providing almost half of our credit out there. And we’re going to have to determine whether or not as a consequence of some of the steps that the Fed has been taking, the Treasury has been taking, that we see the market for securitized products restored.

I’m optimistic that ultimately we’re going to be able to get that part of the financial sector going again, but it could take some time to regain confidence and trust.

What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade. That I think will change. And so part of that has to do with the effects of regulation that will inhibit some of the massive leveraging and the massive risk-taking that had become so common.

Now, in some ways, I think it’s important to understand that some of that wealth was illusory in the first place.

So we won’t miss it?

THE PRESIDENT: We will miss it in the sense that as a consequence of 25-year-olds getting million-dollar bonuses, they were willing to pay $100 for a steak dinner and that waiter was getting the kinds of tips that would make a college professor envious. And so some of the dynamic of the financial sector will have some trickle-down effects, particularly in a place like Manhattan.

But I actually think that there was always an unsustainable feel about what had happened on Wall Street over the last 10, 15 years, and it’s not that different from the unsustainable nature of what was happening during the dot-com boom, where people in Silicon Valley could make enormous sums of money, even though what they were peddling never really had any signs it would ever make a profit.

That doesn’t mean, though, that Silicon Valley is still not a huge, critical, important part of our economy, and Wall Street will remain a big, important part of our economy, just as it was in the ’70s and the ’80s. It just won’t be half of our economy. And that means that more talent, more resources will be going to other sectors of the economy. And I actually think that’s healthy. We don’t want every single college grad with mathematical aptitude to become a derivatives trader. We want some of them to go into engineering, and we want some of them to be going into computer design.

Rhetorically this is very right, but as I've said the policies being undertaken don't fit the rhetoric at all. They seem far more designed to reinflate the financial sector and allow them no consequence for their bad decisions. Maybe this comes later, with regulatory reform. That certainly seems to be the signal from the President.

Let's try to define the problem and work backwards. Clearly, the growth of finance in terms of salary and proportion of the overall economy has gone completely out of balance. The power of Wall Street financiers provides one reason for this, but so does the newfangled structure of the economy which rewards such behavior.

This wasn’t the first time that something like this had happened. There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution. Each wave, Philippon shows, was propelled by the need to fund new businesses, and each left finance significantly bigger than before. In all these cases, it wasn’t so much that the bankers had changed; the world had.

The same can’t be said, though, of the boom of the past decade. The housing bubble was unique, and uniquely awful. Each of the previous waves had come in response to a profound shift in the real economy. With the housing bubble, by contrast, there was no meaningful development in the real economy that could explain why homes were suddenly so much more attractive or valuable. The only thing that had changed, really, was that banks were flinging cheap money at would-be homeowners, essentially conjuring up profits out of nowhere. And while previous booms (at least, those of the twenties and the nineties) did end in tears, along the way they made the economy more productive and more innovative in a lasting way. That’s not true of the past decade. Banking grew bigger and more profitable. But all we got in exchange was acres of empty houses in Phoenix.

The giant pool of money, the large chunk of investment capital from around the world, had to park itself somewhere, and suddenly US home sales became the preferred bet. And then mortgage securitization led to a complete rewriting of the rules for who qualified for loans, and you know the rest.

How can we counteract this? Well, making the financial sector operate without the massive amounts of leverage that encourage bad bets would be a start. Suroweicki thinks we can hope for Wall Street to "recognize that its proper role is, as it has been in the past, to follow the real economy, rather than trying to drive it." I just don't find that realistic, given their power and their mindset. And so we need the independent Pecora Commission that will apparently be chaired to have some real power to make real recommendations that would rein in Wall Street and ensure their growth gets stunted. And forgive me for quoting John Ashcroft, but we need some real accountability and charges filed against any companies that may have broken the law. Interestingly, Ashcroft doesn't believe in the same kind of accountability for torture.

The government must hold accountable any individuals who acted illegally in this financial meltdown, while preserving the viability of the companies that received bailout funds or stimulus money. Certainly, we should demand justice. But we must all remember that justice is a value, the adherence to which includes seeking the best outcome for the American people. In some cases it will be the punishing of bad actors. In other cases it may involve heavy corporate fines or operating under a carefully tailored agreement.

(Do you think the editorial page editors of the Times openly snickered when they accepted this op-ed, and were all too happy to give Ashcroft the rope to hang himself?)

Banks need to understand their core function of providing the swift flow of capital, not to create wealth markets for themselves. That can be achieved through responsible regulation.

Could Have Lifted A Finger

The New York Times takes notice of White House silence in the wake of Sen. Durbin's failure on cramdown.

The Obama administration sat by last week as 12 Senate Democrats joined 39 Senate Republicans to block a vote on an amendment that would have allowed bankruptcy judges to modify troubled mortgages.

Senator Obama campaigned on the provision. And President Obama made its passage part of his antiforeclosure plan. It would have been a very useful prod to get lenders to rework bad loans rather than leaving the modification to a judge.

But when the time came to stand up to the banking lobbies and cajole yes votes from reluctant senators — the White House didn’t. When the measure failed, there wasn’t even a statement of regret.

Digby has mentioned the coming second wave of ARM recasts and accompanying foreclosures, not to mention the acceleration of foreclosures brought on by mounting job loss. As Durbin said in his floor speech, when he first offered up the cramdown option 2 million homes were threatened by foreclosure. Now we're looking at 8 million, and nobody should expect that number to go down the next time the very serious Senate kills the provision. The Times estimates that 14 million homeowners are underwater on their mortgages. As Atrios says today, "I don't want to hear any of this 'nobody could have predicted' crap from Larry and Timmeh."

With opposition that strong, I'm not sure the President could have brought around all twelve Democrats who voted no to his side. But they might have given it a try. Because it's clear now that the best tool for dealing with the second-order foreclosure crisis, which will affect the banks and the greater economy in an exponential way, is lost for the near future, and the consequences will be deep.

Pressured By CA Lawmakers, Obama Expands Mortgage Refinance Program

When the Obama Administration's plan to mitigate foreclosures came out, it was clear that it would be insufficient to deal with the particular challenges faced in California. Initially, the plan would only modify loans where the amount owed was 105% of the home's true value. Given that home prices have collapsed here, this would have helped almost nobody in California. State lawmakers, in particular the Democratic point person on mortgages and foreclosures Asm. Ted Lieu, went to Washington to lobby for changes. And today, faced with a sluggish mortgage rescue program attracting few lenders or homeowners, the Administration expanded the plan.

The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.

Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor [...]

Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.

Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.

Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.

Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.

Loan servicers get a fair bit of cash incentives for participating in the program, which I don't totally support, but if we have to bribe lenders in order to keep people in their homes, that makes more sense than spending the same amount of money on the fallout from a foreclosure. And lenders do take a haircut in the Hope for Homeowners program, the first loss to my knowledge that lenders have been forced to take.

Asm. Lieu responded with this release:

“I am very pleased the Obama Administration today acted on the concerns raised by states such as California and took two steps to expand refinance and foreclosure assistance to distressed homeowners.

First, the Administration announced it would incorporate the Federal Housing Administration’s (FHA) Hope for Homeowners program into the existing Making Home Affordable Program. This is significant because currently, the Making Home Affordable Program has a 105% underwater refinancing cap, which shuts out many Californian homeowners. The Hope for Homeowners program does not have that limitation; instead, the Hope for Homeowners program states that lenders will take a loss on the difference between the existing loan amount and the new refinanced loan, which is set at 96.5% of the appraised loan value.

For example, under the existing Making Home Affordable program, a homeowner whose home is valued at $100,000 but owes $120,000 on the existing loan balance would not qualify for refinancing under the program because the loan is 120% underwater. However, under the Hope for Homeowners program, the homeowner could qualify and the new refinanced loan would be $96,500. The lender would take the loss of $23,500. The Obama Administration would increase the number of lenders participating in the Hope for Homeowners program by offering financial incentives to the lenders.

Second, the Administration announced steps to address the second lien problem. Many distressed mortgages have two liens and often the second lien holder does not want to modify the loan. The Obama Administration will provide financial incentives to allow the second lien to be reduced or extinguished.

These two critical actions will expand assistance to distressed homeowners in states such as California, where many loans are more than 105% underwater or have second liens.”

This is decent news. Unfortunately, the tool that homeowners really need to stave off foreclosure, the ability for bankruptcy judges to cram down the principal of a loan on a primary residence, appears poised for what amounts to defeat in the Senate, a testament to the continued power of the nation's biggest banks.

In order to garner the support of conservative Democrats and a few Republicans, the proposal has been watered down. The bankruptcy legislation will still allow homeowners to renegotiate mortgages in bankruptcy - the so-called cram down provision - but only under strict conditions. The banking industry has lobbied fiercely against cram down, but Durbin said on the Senate floor Monday night that the compromise was supported by Citigroup, which has been at the negotiating table.

"In the past, some of my colleagues understood the need for action but have been uncomfortable with the original language. Let me be clear: this amendment is different," said Durbin. "The amendment I'm going to offer will make a modest change in the bankruptcy code with a lot of conditions. It won't apply across the board. This amendment limits assistance in bankruptcy to situations where lenders are so intransigent that they are unwilling to cooperate with the foreclosure prevention efforts already underway - Obama's homeowner assistance and stability plan and the Congressionally-created HOPE For Homeowners, which this bill will greatly improve." [...]

Meanwhile, the banking lobbyists are furiously lobbying against it and Durbin acknowledges it will be difficult to "muster the votes, although I know it will be hard."

It is "hard to imagine that today the mortgage bankers would have clout in this chamber but they do," said Durbin. "They have a lot of friends still here. They're still big players on the American political scene and they have said to their friends, stay away from this legislation."

We will be in a better position with foreclosures by the end of the week than we were at the beginning, but not where we need to be.

Spitzer Returns

Newsweek writes an article about the attempted comeback of Eliot Spitzer. They ask "can he become a public figure again" in an article making him a public figure again. Also, Spitzer has a column for Slate, which is owned by the same parent company as Newsweek. Michael Wolff is absolutely right to point it out.

But putting that all aside, I agree with Ezra Klein that Spitzer has a unique voice that is simply right for the times. He has been talking about the need for regulating the banks, and not just talking but acting on it, for a long time. This is from 2004:

On the surface, predatory lenders are doing nothing more than seizing a "market opportunity" for refinancing or home-improvement loans in lower-income communities. To be sure, such communities desperately need credit. And it stands to reason that the prices and terms will be less favorable to borrowers whose financial circumstances are troubled or limited. In this sense, predatory loans are the natural outcome of a competitive market.[...]

[But] it is difficult to imagine a less rational, less efficient economic practice than lending of this sort. At the micro-level, it results in a gross misallocation of costs-- imposing higher costs than the market requires on those least able to bear them. At the macro-level, it denies lower-cost capital to whole classes of persons who would otherwise qualify for it and to neighborhoods whose economic vitality depends on it.

In these circumstances, government must step in to curb predatory lending and encourage the flow of fairly priced capital to sectors where it is needed and will be well-used. Filling a gap left by federal inaction, state enforcement efforts in this arena have centered on identifying the valid economic criteria considered in mortgage underwriting and compelling lenders to focus on those factors--not on preconceptions, prejudices, or predatory instincts--in determining how to price home mortgage loans. The point is not to protect people from their own bad decisions or, conversely, to guarantee that mortgages be granted to specific persons or groups on specific terms--that would violate the principle of market freedom. The point is to support equal opportunity and to ensure that borrowers are charged rates and fees based upon their status and qualifications as economic actors in the mortgage market, not upon their diminished access or market savvy or their race.

This was written years before anyone "discovered" the subprime disaster. Simply put, we should not sacrifice valuable insight and opinion on the altar of sexual peccadilloes. Spitzer was an idiot for soliciting prostitutes but his experience is valuable, perhaps too valuable to ignore.