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!

Best To Chris Dodd

Sen. Dodd has been diagnosed with early-stage prostate cancer. My dad had this, and my grandfather too. It's very common and eminently treatable in this day and age, and hopefully Dodd will be able to beat it as quickly and painlessly as possible. He still plans to run for re-election and be back at work after the August recess. Here's part of his letter to supporters:

I want to assure you that I'm feeling fine. As you know, we've been working hard to pass health care legislation and reform our nation's financial system to protect consumers, and that hard work will continue.

After the Senate adjourns at the end of next week, I'll have surgery to remove the cancer. After a week or two of recuperation, I expect to be right back to work.

After all, as a Member of Congress, I have great health insurance. I was able to get screened, seek the opinions of highly skilled doctors, consider all the available options, and choose the treatment that was right for me.

And I know you'll agree that every American deserves the same ability.

We have health care legislation to pass - and an election to win. And I can't thank you enough for your support.

I had the opportunity to meet and talk with Sen. Dodd when he ran for President last year. I found him smart, engaging and focused on the right issues. He's been hammered back home for being the fall guy in the AIG bonus scandal - falsely, I might add - and for this alleged sweetheart deal on his mortgage from Countrywide, which his hometown paper states in two editorials today were not at all sweetheart deals but widely available mortgage terms.

I hope he's back on his feet soon.

Get It In Writing

Despite some slightly better housing news in the past few months, the threat of foreclosure still hangs over the head over a record number of Americans, and this shock to the economy still threatens recovery. One thing is clear - the modification programs attempted over the past year haven't worked at all. In fact, banks would rather foreclose than unentangle the maze of who owns the mortgage and how to legally alter the terms.

Government initiatives to stem the country's mounting foreclosures are hampered because banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements, some economists have concluded.

Policymakers often say it's a good deal for lenders to cut borrowers a break on mortgage payments to keep them in their homes. But, according to researchers and industry experts, foreclosing can be more profitable.

The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can't sustain payments without it yet will be able to keep up with new, more modest terms.

A second set are those who are likely to fall behind on their payments again even after receiving a modified loan and are likely to lose their homes one way or another. Lenders don't want to help these borrowers because waiting to foreclose can be costly.

Finally, there are those delinquent borrowers who can somehow, even at great sacrifice, catch up without a modification. Lenders have little financial incentive to help them.

Because it's in the banks' economic self-interest to foreclose, the plans brought forth by the government to avert foreclosures haven't had much of an effect. Banks are using all sorts of tricks and schemes, to delay modification almost endlessly and raise questions about who qualifies. So today, the President met with mortgage lenders and struck yet another handshake deal.

The Obama administration, scrambling to get its main housing initiative on track, extracted a pledge from 25 mortgage company executives to improve their efforts to assist borrowers in danger of foreclosure.

In an all-day series of meetings Tuesday at the Treasury Department, government officials reached a verbal agreement with the executives for a new goal of about 500,000 loan modifications by Nov. 1 and stressed the program's urgency.

The sessions came amid concerns that the Obama administration will fall far short of its original goal of helping up to 3 million to 4 million troubled borrowers with modified loans.

The bottom line is that voluntary deals with the lending industry or practically any company in finance will not work. They've been deliberately dragging their feet on offering modified loans because they have every incentive not to do it. I don't know how many different housing bills you can enact without teeth and expect some different result. The Administration is acting like they have no authority on this front. And until they demand formal agreements instead of assurances, they'll be trampled upon over and over again.

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...

Scalia Throws A Curve

While there's no question the Supreme Court has tilted significantly to the right, in one case at the end of this session, they squeaked through a very damaging policy for the banking lobby. And believe it or not, it took Antonin Scalia to do it - I guess he's the new "swing vote":

In a rebuke of the Bush administration, the Supreme Court ruled Monday that a federal bank regulator erred in quashing efforts by New York state to combat the kind of predatory mortgage lending that triggered the nation's financial crisis.

The 5-4 ruling by the high court was unusual. Justice Antonin Scalia, arguably the most conservative jurist, wrote the majority's opinion and was joined by the court's four liberal judges.

The five justices held that contrary to what the Bush administration had argued, states can enforce their own laws on matters such as discrimination and predatory lending, even if that crosses into areas under federal regulation [...]

The ruling angered many in the financial sector, who fear it'll lead to a patchwork of state laws that'll make it harder for banks and other financial firms to take a national approach to the marketplace.

"We are worried about the effect that this ruling could have on the markets," said Rich Whiting, general counsel for the Financial Services Roundtable, a trade group representing the nation's 100 largest financial firms, in a statement. The decision "hinders the ability of financial services firms from conducting business in the United States. Even worse, it will cause confusion for consumers, especially those who move from state to state."

If there's one thing I love seeing in print, it's the words "the ruling angered many in the financial sector."

The near-term practical effect of this is that the states can resume looking into the lending practices of the banks in their regions, and potentially take them to court. Andrew Cuomo, the winner in this lawsuit, has been doing some of the best work in the country fighting the banks, and now he's empowered to continue.

These kinds of rules preventing pre-emption of the state laws when it comes to financial services are one key element of the creation of the new Consumer Financial Protection Agency, which the banks also can't stand, because it would consolidate consumer protection laws and enforce rigid standards for mortgages, credit cards, payday lending and consumer credit. Cue the whining:

"We have the view that the market, left to its own devices, isn't always going to lead to an optimal outcome for consumers," Michael Barr, the assistant treasury secretary for financial institutions, said in a news briefing.

Financial institutions said the move went beyond a step back to regulation.

"This is going in headfirst," said Scott Talbott, the senior vice president of government affairs for the Financial Services Roundtable, the lobby for the nation's biggest financial firms. "This could take us back to the 1950s."

While denying that the legislation is heavy-handed, Barr acknowledged that it would open a new era of financial regulation.

"I don't think it's a surprise that big banks and institutions that benefited from the status quo want to keep it that way. It's unacceptable to us," he said.

Now, if we actually can get this modern-day Pecora Commission off the ground, we'll at least have a multi-pronged approach to going after those who caused the financial crisis and continue to rip off their customers. I'm not all that optimistic, given the fact that the banksters own the place. But at least we have a chance.

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.

Regulating Financial Products

Let's start with the agreement that the financial crisis, sated by trillions in government money, has eased. Those who understand LIBOR rates and TED spreads can explain that interbank lending and credit availability has increased. And banks have been able to raise capital, or at least most of them. GMAC wasn't so lucky, and so they're getting a $7.5 billion dollar bailout. And some top banks want to repay the government all of the TARP money.

But claiming that the system is healthy doesn't really pass the smell test. First of all, the program to buy toxic assets hasn't yet been implemented - Tim Geithner now says that will be ready around July. And Geithner's sloth in dealing with the multiplicity of issues has caused something of a crisis of confidence. Ultimately, the banks have been propped up, but the economy remains sick, CONSUMER lending doesn't seem to have bounced back, unemployment keeps rising, and some huge pitfalls, like a second foreclosure wave, remain out there.

We've lost this debate inside the White House - they will do whatever it takes to keep the banks afloat. However, the debate has shifted into what happens afterwards. How will the financial business be regulated to ensure no repeats of this crisis, and to reduce banks to their nominal function of helping capital flow? The White House is talking about moving regulatory power from the SEC to the Federal Reserve, which has a rearranging the deck chairs quality to it. The Fed missed the crisis, too, and are arguably even cozier with the big banks. However, this development would be truly welcome.

The Obama administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds, according to several sources familiar with the matter.

The proposed commission would be one of the administration's most significant steps yet to overhaul the financial regulatory system. It would also be one of its first proposals to address causes of the financial crisis such as predatory mortgage lending.

Plans for a new body remain fluid, but it could be granted broad powers to make sure the terms and marketing of a wide range of loans and other financial products are in the interests of ordinary consumers, sources said.

Elizabeth Warren details this plan here - essentially, her argument is that toasters are regulated so that they won't explode in your house, so why not regulate mortgages that can explode with far more fury?

,"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street," Warren wrote. "Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?"

Warren proposed creating a new commission modeled on the Consumer Product Safety Commission, which protects buyers of products such as bicycles and baby cribs.

A Financial Products Safety Commission would have the power to protect consumers from shoddy financial instruments. For all the power of the banksters, they still had to go to people to get the mortgage-backed securities they needed to feed the beast of the surge of capital during the housing bubble. If the people were protected through regulations that barred the kinds of mortgages they were giving out, we have no crisis.

Simon Johnson has further thoughts coming out of a Congressional hearing on the subject, and he sounds positively giddy.

1. We need layers of protection against financial excess. Think about the financial system as a nuclear power plant, in which you need independent, redundant back-up systems - so if one “super-regulator” fails we don’t incur another 20-40 percentage points in government debt through direct and indirect bailouts. A consumer financial products protection agency should definitely be part of the package.

2. Congress will work on this. The intensity of feeling with regard to the need to re-regulate is striking, and there is much that resonates across the political spectrum.

3. In the end, much of banking is likely to become boring again. Special interests are convinced that they can fend off the regulatory challenge, but I find this increasingly unlikely. Enough people have seen through what they did, how they did it, and what they keep on doing. No doubt the outcomes will be messy and less than optimal, but at this point “less than optimal” is much preferable to “systemic meltdown”.

There is still much to argue about and, no doubt, there will be setbacks. We’ll get a better or a worse system, depending on how the debate goes. And if the external scrutiny slips away, so will point #3 above. But this was still by far the most encouraging hearing I’ve so far attended.

I'm not thrilled with the Administration's policies on the banks so far, but this would really be a step forward and Congress can lead it.

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.

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.

Dick Durbin's Searing Indictment of Banksters On The Senate Floor

Dick Durbin is speaking about the destructive greed of the banksters right now, the ones who torpedoed his amendment to allow bankruptcy judges to modify loan terms on primary residences the way they can on second homes, yachts, cars, and other pieces of property. He was unsparing and did not shy away from the statement he made on local radio in Illinois recently, that the bankers "own the place". He set the needs of regular homeowners, who "don't have any paid lobbyists," against the desires of banks who took hundreds of billions of dollars of taxpayer money and face seemingly no consequence for their bad decisions.

Durbin is a close ally of the President and I feel he wouldn't make a statement like this if he thought it too embarrassing to the Administration. He is trying to spark the American people to demand some change. Obama has done this too, albeit with more subtlety. We need to get their backs.

Here are a couple of excerpts (I'm transcribing):

One other argument that I think takes the cake: "Senator, you understand the moral hazard here. People have to be held responsible for their wrongdoing. If you make a mistake, darn it, you've gotta pay the price. That's what America is all about." Really, Mr. Banker on Wall Street? That's what America is all about? What price did Wall Street pay for their miserable decisions creating rotten portfolios, destroying the credit of America and its businesses? Oh, they paid a pretty heavy price. Hundreds of billions of dollars of taxpayer's money sent to them to bail them out, to put them back in business, even to fund executive bonuses for those guilty of mismanaging. Moral hazard, huh? How can they argue that with a straight face? [...]

At the end of the day, this is a real test of where we're going in this country. Next up, after mortgages, credit cards. Next week, the same bankers get to come in and see how much might and power they have in the Senate when it comes to credit card reform. And the question we're going to face, is whether or not this Senate is going to listen to the families facing foreclosure, the families facing job loss and bills they can't pay, or whether they're going to listen to the American Bankers Association, which has folded its arms and walked out of the room. Well, I hope that we have the courage to stand up to them. I hope this is the beginning of a new day in the Senate, a new dialogue in the Senate, that says to the bankers across America that your business as usual has put us in a terrible mess, and we're not going to allow that to continue. We want America to be strong, but if it's going to be strong, you should be respectful, Mr. Banker, of the people who live in the communities where your banks are located. You should be respectful of those families who are doing their best to make ends meet in the toughest recession that they've ever seen. You should be respectful of the people that you want to sign up for checking accounts and savings accounts, and make sure that they have decent neighborhoods to live in. Show a little loyalty to this great nation instead of just your bottom line when it comes to profitability. Take a little consideration of what it takes to make America strong...

I'll offer this Durbin amendment as I did last year. When I offered it last year, they said, "Not a big problem, only two million foreclosures coming up." They were wrong. It turned out to be eight million. And if the bankers prevail today, and we can't get something through conference committee to deal with this issue, I'll be back. I'm not going to quit on this [...] At some point, the Senators in this chamber will decide, the bankers shouldn't write the agenda in the United States Senate.

There's really not much to add to that. Especially when you see the Senate vote, which is happening right now, surely a defeat for the Durbin amendment. The Senators against this bill have lined up with the banksters, and for good reasons - they fund the campaigns, they throw the best parties, they share the interests and perspective of those disproportionately wealthy politicians. Last night, at Obama's press conference, he offered another hint of how the federal government is so immense that he cannot wield the power to "get the banks to do what I want them to do." Today he lashed out at the small group of hedge funds who forced Chrysler into bankruptcy, not just because they thought they could get a better deal from the bankruptcy judge, but because they'll get paid off on their credit default swaps due to the bankruptcy.

The Obama budget, mostly laudatory, stripped out those elements which would have taxed wealth, instead protecting it in many instances. The system of government in this country has become a system of fealty to oligarchs. Democrats like Durbin made one concession after another on the bankruptcy bill, and still couldn't get enough members of the Senate on board.

We have a major problem in this country, when the banksters hold this much control in the corridors of power. Dick Durbin is opening the window and showing the sick, decayed underbelly inside. Actions like the shareholder revolt ousting Ken Lewis from the chairmanship of Bank of America need to happen more and again. At some point, we can affect these people personally, and really damage them where they live. It's the only way, through a broad-based movement, to overturn this horrible dynamic of financial industry control of government.

UPDATE: 45 Yea, 51 Nay, motion fails. Abominable. Will update with a roll call. This Senate is useless.

UPDATE II: Roll call. Nays included all Republicans and Baucus, Bennet, Byrd, Carper, Dorgan (?), Johnson, Landrieu, Lincoln, Nelson (NE), Pryor, Specter, Tester. Also, some video of Durbin's speech here.



UPDATE III: Ryan Grim shouts out to Ted Kaufman, the first Senator from Delaware to vote against the banks maybe in history. Being a caretaker Senator not planning on running for re-election will do that.

Banks Still Rule Washington, But The Shareholder Meetings?

The bad news is that the Senate is on the verge of gutting that mortgage "cram-down" bill, removing the ability for bankruptcy judges to modify the terms of loans for primary residences of people facing foreclosure.

Democrats Ben Nelson (Neb.), Mary Landrieu (La.) and Jon Tester (Mont.) have indicated to the Huffington Post that they oppose the bill's central measure -- giving bankruptcy judges the power to reduce, or cramdown, a homeowner's mortgage payment under bankruptcy proceedings.

That provision is on the chopping block.

"The bill that the House sent us is a very, very good bill, a very good bill," said Reid. "It would be a terrific bill if we had cramdown in it and it'll still be a good bill if that's not in it."

Cramdown, however, is the guts of the bill, House Speaker Nancy Pelosi (D-Calif.) told the Huffington Post.

"Well, it wouldn't be a bankruptcy reform bill without cramdown in it," she said.

The two versions of the bill would need to be reconciled in a conference committee. "I strongly support [cramdown], but we'll see what happens on the Senate floor," said Pelosi.

I can tell you what will happen, the banking lobby refuses to relinquish the power they hold, and will squash efforts to write down these loans. Because the banks, in the words of Dick Durbin, own the place. So despite the facts that the lenders committed clear acts of fraud on practically all of their customers when handing out the loans, the people will get no relief with the only tool available to them to ensure a level playing field when they try to rewrite the terms.

On the flip side, a shareholder revolt led by institutional investors, state pension funds, union leaders and everyday people got Ken Lewis fired as the chairman of Bank of America. He remains on as CEO but lost the chairmanship to Walter Massey. This may not mean a hell of a lot on its own, but it's a powerful symbol of the anger felt by people out in the country with the banksters. And this will only grow. If Congress refuses to take action on these executives, maybe the people will hold them to account.

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.

It Comes Back To Housing

This was a really lucid article from Steven Gjerstad and Vernon L. Smith explaining the role of housing in the financial crisis, in case you're having trouble explaining this to your friends and family:

The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.

But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.

And that's where we are. The resets from all those ARMs could be foreseen pretty easily, but with rising prices, analysts who erred on the side of irrational exuberance thought people could just refi their way out of them and be saved by the price increase. It never was sustainable. And the securitization of the loans turned would could have been just a nasty problem confined to the specific sector into a global meltdown. When small towns in Tennessee and Alabama are swapping credit defaults and derivatives, you can see the problem clearly.

There's been a lot of talk about how we're saving the banks, but somewhat less on what we are doing at the root of the problem. There's a compelling argument to let this run its course and allow housing prices to revert back to the mean. That may be so, but rising foreclosures STILL destroy value in the market, because no buyers become willing to accept a property at anything but fire sale prices, constraining the ability of people who want to sell their home for other reasons and really upending the market. Today the President held a housing refinance roundtable and seemed to suggest that part of the solution lay in more refinancing:

What you've seen now is rates are as low as they've been since 1971. Three-quarters of the American people get their mortgages through a Fannie Mae-Freddie Mac qualified loan. And as a consequence of us being able to reduce the interest rates that are available, we have now seen some extraordinary jumps in the rate of mortgage refinancings.

And everybody here represents families who have saved hundreds of dollars a month, thousands of dollars a year in some cases, and that's money directly in their pocket. More importantly, what it's allowed them to do is to consolidate their loans in some cases, reduce the length of their mortgages in other cases. It has given them the kind of security and stability in their mortgage payments that a lot more people can take advantage of.

So the main message that we want to send today is, there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates. That is money in their pocket. And we estimate that the average family can get anywhere from $1,600 to $2,000 a year in savings by taking advantage of these various mortgage programs that have been put in place.

This makes sense in terms of economic stimulus but does absolutely nothing to restore the housing market, IMO. One can view pushing down mortgage interest rates and encouraging refinancing as a way to put money in the pockets of homeowners, money that they may be willing to spend. But the universe of people who just need a reduction in their interest rate to save their home is sadly pretty small. The loan modifications that have been interest-only frequently resulted in foreclosure down the road. Obviously this is not the only element of the Obama plan - and I see the point in highlighting it, because it could mean millions of dollars circulated into the economy, as well as a make-work plan for loan servicers - but it reflects a willingness to just tinker around the edges of housing policy instead of really attacking the problem.

Barney Frank's proposals to crack down on the types of loans servicers can offer by stopping 100% securitization and lots of subprime lending makes a lot of sense, but that's a second-order problem. The first-order problem is how to stop all these foreclosures. I'd like to see more attention paid to that.

The Housing Death Spiral

In fairness, the new Obama Administration housing policy has not had the time to work. But judging on past performance, and based on the fact that principal reductions aren't really part of the Obama plan, I would expect the same results:

Mortgages modified in the third quarter failed at a faster pace than those revised in the first, and the delinquency rate on the least risky loans doubled, signs of deteriorating credit quality, U.S. regulators said.

Loans modified in the first quarter to help borrowers keep their homes fell delinquent 41 percent of the time after eight months, and second-quarter loans had a 46 percent default rate, the Office of the Comptroller of the Currency and Office of Thrift Supervision said in a report today. Third-quarter trends “are worsening,” the agencies said.

“For the year and this quarter, we saw the same trend that we saw last time: quite high re-default rates, no matter how we measured them,” John Dugan, the U.S. Comptroller of the Currency, said in a conference call with reporters.

Lenders including Citigroup Inc. and loan-servicing companies are adjusting mortgages by lowering interest rates or crafting longer-term payment plans. The Obama administration is acting to help as many as 9 million struggling homeowners by using taxpayer funds to pay lenders such as bond investors, mortgage servicers for reworking the mortgages.

Dugan said higher re-default rates are likely related to stressful economic conditions and new loan plans are not producing significant reductions to make mortgages sustainable.

It's frustrating, considering that banks aren't even acting in their own best financial interest. Given the falloff in the market, foreclosing a home and reselling it would return less money than reducing principal and letting the homeowner stay in the home. But the loan servicers don't seem to want to deal with unwinding the securitization of the loans, and deal with potential lawsuits from writing down their security.

Why isn't that happening? Ah, those pesky securitizations. Although investors litigating to block mods is the oft-given reason for not taking this course of action (a presumed to be high number of securitizations either bar or restrict mods), my impression is servicers simply have not wanted to fight this fight (they have clearly defined compensation in the case of foreclosure versus no rewards for mods, save the fees under new government programs). Paying legal fees to fight investors is an even more dubious business proposition (it's a near certainty they can't charge those expenses to the securitization trust, and it would thus come out of their bottom line).

That is a long winded way of saying I doubt that there has been much study by legal talent as to how to overcome mod restrictions in servicing agreements. Given the high level of fraud (in a small sample, Fitch found evidence of fraud in every loan file it examined), there might be ways to persuade investors they have more to lose than gain by pursuing this line of legal action.

Major banks and financial firms won't even work with mortgage brokers anymore, suggesting that the entire market is hopelessly broken. New rules and standards for loans going forward are on the way, but that does nothing for those struggling to make payments right now.

The answer is, and has always been, to allow bankruptcy judges to modify the terms of the loan, which would encourage the loan holders to work out a deal. But while that passed the House, the Senate "moderates" have refused to move forward because the corporate interests holding the strings on them have refused to allow it.

Re-Regulation Musings

Obviously, after we take our medicine and spend historic amounts of bailout money for the banks, we're going to need some serious re-regulation. This crisis was caused through a bipartisan failure to rein in runaway capitalism, and an unwillingness to set limits on the financial industry, until it grew too big to fail. The economy became unbalanced, driven by a sector that didn't produce goods but financial services, and when it made mistakes, we all paid the price.

There are some proposals already floating around. Some top Democrats want a new agency to regulate financial products.

On Tuesday, House and Senate Democrats, joined by Elizabeth Warren (who heads the commission overseeing the disbursement of bailout funds), announced a bill to create a Financial Product Safety Commission. The body would have oversight of mortgages and other financial instruments just as other commissions regulate the safety of toys, drugs or airplanes [...]

Warren, who has been singled out for seeing the roots of the economic collapse before it happened, highlighted how the commission would work and how it could have prevented the current crisis.

She offered the example of a loan with a low "teaser rate" and an obscured prepayment penalty. "Prepayment penalties are a way to try to fool [borrowers] into thinking the price is $1100 dollars a month -- that's the teaser rate -- when in fact the real price of this product is the equivalent of $1900 dollars a month. And if you try to refinance out of the product, you'll pay a prepayment penalty. That's how the company will make its money. You'll either pay higher interest later on, or you'll pay a prepayment penalty to get out of it."

When the price rises to $1900 a month or higher, the borrower can't refinance, can't make the payment, and goes into foreclosure.

"If there had been an agency, like the Financial Product Safety Commission, that had said, 'You just don't get to fool people on pricing,' then what would have happened is," she said, "there would have been millions of families who got tangled in predatory mortgages who never would have gotten them."

The idea of cooling down bubbles, which this would do because it would mean that not everyone with a pulse would qualify for a loan, strikes at the root of the crisis of the past 30 years with the US economy. It's also true that a new agency would have certain advantages, because it could be imbued with a certain stature and credibility (Obama could go far to help this along). But there are also steps that the current regulators could take, which could also get at this problem of discouraging bubbles and reckless activity from the banks. Simply put, the Fed could tie capital ratios to economic growth.

Capital ratios basically regulate the amount of leverage a bank is allowed to take on, and what Bernanke is suggesting here is that in good times, when animal spirits are high and anyone with a pulse is offered a no-down loan, capital ratios should be increased, thus reducing bank lending and keeping leverage within reasonable bounds. In bad times, when animal spirits are moribund and deleveraging shuts down the credit pipeline, capital ratios should be decreased, allowing banks to loan more money.

This has always struck me as a good idea. But Bernanke doesn't say how he thinks it should be done. Would a board of some kind make these decisions twice a quarter, the way the Fed does with interest rates? Or would there be some kind of automatic mechanism involved? If the former, what confidence do we have that they'd really be willing to take the punch bowl away during boom times? The Fed sure wasn't willing to do so during the 2002-07 expansion. Overall, this is a good suggestion, but it could bear some fleshing out.

There are lots of suggestions out there, like reinstituting Glass-Steagall, and killing the shadow banking system. Or setting a hard limit for leverage allowances. What would be unacceptable is just fixing the near-term crisis and going home. One of the reasons Tim Geithner does not reassure me is that he has such a close relationship to the banking industry and might be unwilling to place the necessary constraints on them.

...you actually know how important re-regulation is by seeing that Alan Greenspan doesn't think we need it.